Required information Problem 18-2A Scatter diagram and cost behavior estimation

Question

Required information Problem 18-2A Scatter diagram and cost behavior estimation LO P1 (The following information applies to the questions displayed below] Alden Co's monthly unit sales and total cost data for its operating activities of the past year follow. Management wants to use these data to predict future fixed and variable costs. Month Units sold Total Cost $160,000 100,000 220,000 100,000 230,000 120,000 MonthUnits SoldTotal Cost 320,000 160,000 280,000 200,000 300,000 200,000 340,000 280,000 80,000 160,000 100,000 110,000 $220, 000 160,000 64,000 140,000 100,000 80,000 10 12

Explanation / Answer

2)

calculation regarding costs at the high point

Total costs at high point = $220000

Formula for calculation which will give us variable cost per unit = total costs at high point - total costs at low point / total volume at high point - total volume at low point

Variable cost per unit at high point= ($220000- $64000)/340000-80000

= $156000/260000

Variable cost per unit at high point = $0.6 per unit

Calculation of total variable costs and total fixed costs = Highest Activity Cost - (Variable Cost Per Units x Highest Activity Units)

= $220000 - ($0.6×340000)

= $220000 - $204000

Total fixed cost at high point= $16000

In simple terms total fixed costs = total costs - total variable costs

Similarly we can calculate the respective costs for low point which are :

Total costs at low point = $64000

Total fixed costs at low point = $16000

3)

Predictions for future total costs when sales volume is (a)200000 units and (b) 300000 units

Notes : variable costs per unit is $0..6 per unit and total fixed costs are $16000

Variable costs remain same in cost per unit but change in total

Whereas, total cost vary in per unit and remain same in total

For activity level of 300000 units we have :

Total variable costs = activity level ×variable costs per unit

=300000units × $0.6

= $180000

Total fixed costs = $16000 which remains same for every level of output in a specified range

Thus total costs come to $(180000+16000) which is $196000

Jsjs

Particulars units sold amount (in $) Variable cost at high point: Volume at high point 340000 Variable cost per unit 0.6 Total variable cost at high point 120000 Total fixed cost 16000

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