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The Education Coordinator decides that the Community College packs may be unduly influencing the high-low computation
The Education Coordinator decides that the Community College packs may be unduly influencing the high-low computation. She decides to re-run the results omitting the Community College volume. Required 1. Using the monthly utilization information presented below, and omitting the Community College training packs, find the fixed and variable portion of costs through the high-low method. Note that the college anly acquires packs in three months of the year: January, May, and September. These dates coincide with the start dates of their Semesters and summer school 2. The reason the Education Coordinator needs to know how much of the cost is fixed is because she is supposed to collect the appropriate variable cost from the Community College for their packs. For her purposes, which computation do you believe is better? Why? Total Number of Total Community College Community College Month Training Packs Cost Number Packs Cost January 1,000 $6,200 200 $1,240 February 200 1,820 March 250 2,350 April 400 3,440 May 700 4,900 300 2,100 June 300 2,730 150 1,470 August 100 1,010 September 1,100 7,150 300 1950 October 300 2,850 November 250 2.300 December 100 1,010
Expert Solution
GIVEN:
The data set as seen in the question.
REQUIRED:
(1) fixed and variable portions of cost using high-low method
(2) suggestion on which computation is better for this purpose
SOLUTION:
(1)
As per the formula of High-Low method :
variable cost per unit= (highest cost-lowest cost)/(highest activity-lowest activity)
since, highest cost(7150) was incurred in the month of september(no. of units = 1100) and the lowest cost(1010) was incurred in the month of August/december(with no. units = 100)
substituting the values into the high-low method formula gives :
vairable cost per unit = (7150-1010)/(1100-100)
variable cost per unit = 6140/100
variable cost per unit = 6.140
now, total variable cost for any month = variable cost per unit*total number of units produced in that month
like, total variable cost for january = 6.140*1000 = 6140
and the total fixed cost for any month = total cost of that month - total variable cost for that month
like, total fixed cost for january = 6250-6140 = 110
we can also calculate the fixed cost per unit for a particular month by dividing the total fixed cost by the number of units produced in that month
like, fixed cost per unit in month of january = total fixed cost in january/ number of units in january
fixed cost per unit in month of january = 110/1000
fixed cost per unit in month of january = 0.11
Similarly, fixed and variable costs for every month can be calculated and summarized as follows:
| MONTH | TOTAL NO. OF TRAINING PACKS | TOTAL COST | total variable cost@ variable cost of 6.140 per unit | total fixed cost =total cost - variable cost | fixed cost per unit of training packs |
| JANUARY | 1000 | 6250 | 6140 | 110 | 0.11 |
| FEBRUARY | 200 | 1820 | 1228 | 592 | 2.96 |
| MARCH | 250 | 2350 | 1535 | 815 | 3.26 |
| APRIL | 400 | 3440 | 2456 | 984 | 2.46 |
| MAY | 700 | 4900 | 4298 | 602 | 0.86 |
| JUNE | 300 | 2730 | 1842 | 888 | 2.96 |
| JULY | 150 | 1470 | 921 | 549 | 3.66 |
| AUGUST | 100 | 1010 | 614 | 396 | 3.96 |
| SEPTEMBER | 1100 | 7150 | 6754 | 396 | 0.36 |
| OCTOBER | 300 | 2850 | 1842 | 1008 | 3.36 |
| NOVEMBER | 250 | 2300 | 1535 | 765 | 3.06 |
| DECEMBER | 100 | 1010 | 614 | 396 | 3.96 |
(2) for the purpose of collection of the variable costs from the community college, following table can be used which is created using the data from the above mentioned table.
| MONTH | COMMUNITY COLLEGE NUMBER PACKS | COMMUNITY COLLEGE COST | fixed cost per unit | total fixed cost | total variable cost | variable cost per unit |
| JANUARY | 200 | 1240 | 0.11 | 22 | 1218 | 6.09 |
| FEBRUARY | ||||||
| MARCH | ||||||
| APRIL | ||||||
| MAY | 300 | 2100 | 0.86 | 258 | 1842 | 6.14 |
| JUNE | ||||||
| JULY | ||||||
| AUGUST | ||||||
| SEPTEMBER | 300 | 1950 | 0.36 | 108 | 1842 | 6.14 |
| OCTOBER | ||||||
| NOVEMBER | ||||||
| DECEMBER |
in this table, fixed cost is taken from first table the calculation procedure of which is mentioned above. Same method of subtracting the fixed cost from total cost has been followed to arrive the variable cost.
suggestion on which computation is better for this purpose
It is always advised to use the Regression Analysis in such cases since it fetches more accurate results than the traditional high-low method. Regression Analysis has the potential to generete highly accurate results since it takes into account all the data/observation points whereas the HIgh-low method uses only two data/observation points i.e. highest cost with its corrosponding number of units and the lowest cost with its corrosponding number of units.
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