Kara Reynolds, owner of Flower Direct, operates a local chain of floral shops. E
ID: 2416593 • Letter: K
Question
Kara Reynolds, owner of Flower Direct, operates a local chain of floral shops. Each shop has its own delivery van. Instead of charging a flat delivery fee, Reynolds wants to set the delivery fee based on the distance driven to deliver the flowers. Reynolds wants to separate the fixed and variable portions of her van operating costs so that she has a better idea how delivery distance affects these costs. She has the following data from the past seven months: Use the high-low method to determine Flower Direct's cost equation for van operating costs. Use your results to predict van operating costs at a volume of 14,500 miles. Let's begin by determining the formula that is used to calculate the variable cost (slope). Now determine the formula that is used to calculate the fixed cost component. Use the high-low method to determine Flower Direct's operating cost equation. (Round the variable cost to the nearest cent and the Use the operating cost equation you determined above to predict van operating costs at a volume of 14,500 miles. The operating costs at a volume of 14,500 miles isExplanation / Answer
High-Low Method Formula = y = a + bx
Variable Cost per Unit
Variable cost per unit (b) is calculated using the following formula:
Variable Cost per Unit =
y2 y1
x2 x1
= (5730- 5040) / (18500 – 15500)
= $ .23 per unit
Where,
y2 is the total cost at highest level of activity = 5730
y1 is the total cost at lowest level of activity = 5040
x2 are the number of units/labor hours etc. at highest level of activity= 18500
x1 are the number of units/labor hours etc. at lowest level of activity= 15500
The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of units produced).
Total Fixed Cost
Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:
Total Fixed Cost = y2 bx2 = y1 bx1
=$5730 – 18500*0.23
= $1475
The operating cost at a volume of 14500 miles is $14500*.23 + $1475 = $4810
Variable Cost per Unit =
y2 y1
x2 x1
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