Smythe, Ltd., provides nationwide passenger train service on 21,000 miles of rou

Question

Smythe, Ltd., provides nationwide passenger train service on 21,000 miles of routes.

Selected operating data for the latest fiscal year are shown below.

a. The above data provide three possible activity measures that could influence fuel expense. Use the high-low method to develop a cost formula for fuel expense for each of the three measures.

b. Do any of the cost formulas you developed in (a) appear to be a poor choice for estimating future train operations expense? Why?

c. Which formula do you think will make the most accurate predictions? Why?

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Explanation / Answer

Solution a:

Cost formula of fuel expense using activity measure "Nos of passangers"

Variable cost per passanger using high low method = (Fuel expense at high level - Fuel expense at low level) / (High level activity - Low level activity)

= ($25,480 - $19,990) / (2480 - 2030) = $12.20 per passanger

Fixed cost = $25,480 - 2480*$12.20 = -$4,776

Cost formula = -$4,776 + $12.20 X

Cost formula of fuel expense using activity measure "Passanger miles"

Variable cost per passanger mile using high low method = (Fuel expense at high level - Fuel expense at low level) / (High level activity - Low level activity)

= ($25,459 - $22,435) / (580214 - 361214) = $0.0138 per passanger miles

Fixed cost = $25,459 - (580214 * 0.0138) = $17,452

Cost formula = $17,452 + $0.0138 X

Cost formula of fuel expense using activity measure "Train miles"

Variable cost per passanger mile using high low method = (Fuel expense at high level - Fuel expense at low level) / (High level activity - Low level activity)

= ($25,459 - $22,225) / (3515 - 3025) = $6.60 per train miles

Fixed cost = $25,459 - (3515 * $6.60) = $2,260

Cost formula = $2,260 + $6.60 X

Solution b:

Cost formula developed using nos of passangers as activity measures seems to be a poor choice for estimating future train operating expense. In this formula fixed cost is negative which is impossible. Fruther fuel expenses cannot be linked with nos of passangers.

Solution c:

I think cost formula using train miles as activity measures is most accurate predictions as fuel expenses is directly linked with train miles and same has no relevance with nos of passangers in train.

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