High-Low Method for a Service Company Boston Railroad decided to use the high-lo

Question

High-Low Method for a Service Company

Boston Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Boston Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.

Determine the variable cost per gross-ton mile and the fixed cost.

Transportation Costs Gross-Ton Miles January $639,600 301,000 February 713,100 336,000 March 504,000 218,000 April 683,700 326,000 May 573,500 262,000 June 735,200 354,000

Explanation / Answer

Variable cost per unit=[Total cost at highest level-Total cost at lowest level]/(Highest level-Lowest level)

(735200-504000)/(354000-218000)=$1.7 per gross-ton mile

Total fixed cost=735200-(1.7*354000)=$133,400.

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