Exercise D2-11 Crane Flower Cart incurred the following monthly costs. Using the
ID: 2330104 • Letter: E
Question
Exercise D2-11
Crane Flower Cart incurred the following monthly costs.
Using the form y = mx + b, estimate the cost formula for each cost incurred by Crane Flower Cart. (Round unit cost to 2 decimal places, e.g. 52.75. If the cost equation has no variable component enter 0 for the amount.)
Balloons
Insurance
Delivery
Employee Compensation
Advertising
Bouquets Sold 5,000 7,500 10,000 Balloons (10 per bouquet) $ 10,000 $ 14,000 $ 18,000 Insurance $ 5,000 $ 5,000 $ 5,000 Delivery $ 5,500 $ 7,750 $ 10,000 Employee compensation $ 10,000 $ 12,500 $ 15,000 Advertising $ 1,500 $ 1,500 $ 1,500Explanation / Answer
Answer:
As per High-low method, Variable Cost per Unit = y2 – y1 / x2 – x1
Total Cost at Highest Level of Activity = y2
Total Cost at Lowest Level of Activity = y1
Total Units at Highest Level of Activity = x2
Total Units at Lowest Level of Activity = x1
Total Cost = b + mx
Total Cost = Fixed Cost + (Variable Cost per Unit * Units)
Balloons:
Total Cost at Highest Level of Activity (y2) = $18,000
Total Cost at Lowest Level of Activity (y1) = $10,000
Total Units at Highest Level of Activity (x2) = 10,000
Total Units at Lowest Level of Activity (x1) = 5,000
Variable Cost per Unit = (18,000 – 10,000) / (10,000 – 5,000)
Variable Cost per Unit = 8,000 / 5,000
Variable Cost per Unit = $1.60 per Unit
Total Cost = b + mx
$18,000 = b + ($1.60 * 10,000)
b = $2,000
Fixed Cost is $2,000.
Balloons = $2,000 + $1.60x
Insurance:
As, Total Cost remains same at all units of Bouquets sold. Therefore, Variable Cost per Unit is Zero.
Fixed Cost (b) = $5,000
Variable Cost per Unit (m) = $0
Insurance = $4,000 + $0.00x
Delivery:
Total Cost at Highest Level of Activity (y2) = $10,000
Total Cost at Lowest Level of Activity (y1) = $5,500
Total Units at Highest Level of Activity (x2) = 10,000
Total Units at Lowest Level of Activity (x1) = 5,000
Variable Cost per Unit = (10,000 – 5,500) / (10,000 – 5,000)
Variable Cost per Unit = 4,500 / 5,000
Variable Cost per Unit = $0.90 per Unit
Total Cost = b + mx
$10,000 = b + ($0.90* 10,000)
b = $1,000
Fixed Cost is $1,000.
Delivery = $1,000 + $0.90x
Employee Compensation:
Total Cost at Highest Level of Activity (y2) = $15,000
Total Cost at Lowest Level of Activity (y1) = $10,000
Total Units at Highest Level of Activity (x2) = 10,000
Total Units at Lowest Level of Activity (x1) = 5,000
Variable Cost per Unit = (15,000 – 10,000) / (10,000 – 5,000)
Variable Cost per Unit = 5,000 / 5,000
Variable Cost per Unit = $1.00 per Unit
Total Cost = b + mx
$15,000 = b + ($1.00* 10,000)
b = $5,000
Fixed Cost is $5,000.
Employee Compensation = $5,000 + $1.00x
Advertising:
As, Total Cost remains same at all units of Bouquets sold. Therefore, Variable Cost per Unit is Zero.
Fixed Cost (b) = $1,500
Variable Cost per Unit (m) = $0
Advertising = $1,500 + $0.00x
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