Less fixed expenses Operating income Use the following to answer questions 11 an

Question

Less fixed expenses Operating income Use the following to answer questions 11 and 12: Nala Company is a small one-person company that provides elaborate and imaginative wedding cakes to order for very large wedding receptions. The owner of the company would like to understand the cost structure of the company and has compiled the following records of activity and costs incurred. The owner believes that the number of weddings catered is the best measure of activity Weddings Total Costs Month Catered Incurred January February2 March April May June $3,800 $3,600 $4,000 $4,300 $4,500 $5,200 12 20

Explanation / Answer

Answer 1.11

Variable Cost per unit using high low method :

Highest Activity cost - Lowest Activity cost /  Highest Activity units - Lowest Activity units

lowest Activity Level - February;Units -2 ;Total Cost - $3,600

Highest Activity Level - June ; Units - 20 ; Total Cost - $5,200

Company' Variable cost per wedding catered - $5,200 - $3,600 / 20 units - 2 units

= $88.89 Per Wedding (ie Option D)

Answer 1.12

Total Cost Equation

Total Cost = Total Fixed Cost + Total Variable Cost

Now , We put Total Cost Equation for say lowest Activity level

$3,600 = Total Fixed Cost + ($88.9 *2 units)

Total Fixed Cost = $3,422 (Option B)

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