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Riley Corporation's income statements for the last two years are presented below
Riley Corporation's income statements for the last two years are presented below. Riley manufactured 7,500 and 10,500 school desks in 2020 and 2019, respectively and had no beginning or ending inventories.
2020 2019 Sales 53,750,000 55,250,000 Cost of Goods Sold 258,000 332,850 Gross profit 3,492,000 4,917,185 Operating expenses 2,095,200 2,278,695 Net profit 51396,800 52,638,490
Instructions
a) Estimate the company's total variable cost per unit and its total fixed costs per year using the high-low method. 5 marks b) What is the equation of the line using the high-low method? 2 marks NOTE- You are to complete the questions above on appropriate separate document(s). Acceptable formats include: word document, excel documents, documents written by hand (scanned and uploaded as a pdf or jpeg file), or any template you have access to that fulfils the question requirements. You will then upload this or 'drag and drop' the file(s) into the upload box at the bottom of this question box.
Expert Solution
a) Computation of Company's Total Variable Cost per Unit and Total Fixed Costs per Year using High-low Method:
Total Manufacturing Cost at the Highest level of activity (y2) = $332,850
Total Manufacturing Cost at the Lowest level of activity (y1) = $258,000
Unit at the Highest level of activity (x2) = 10,500
Unit at the Lowest level of activity (x1) = 7,500
As per High-low method,
Variable Cost per unit = (y2 - y1) / (x2 - x1)
Variable Cost per unit = ($332,850 - $258,000) / (10,500 - 7,500)
Variable Cost per unit = $74,850 / 3,000
Variable Cost per unit = $24.95
The Estimated Company's Total Variable cost per unit is $24.95
Total Manufacturing Cost at an activity level of 7,500 (x) units = $258,000
Variable Cost per unit (b) = $24.95
Total Cost = a + bx
$258,000 = a + ($24.95 * 7,500)
$258,000 = a + $187,125
a = $70,875
The estimated Company's Total Fixed Cost per year is $70,875
b) Cost Equation using High-low Method:
Total Cost = $70,875+($24.95*Number of Units)
Or
Total Cost = $70,875 + $24.95x
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