High-Low Method for a Service Company Boston Railroad decided to use the high-lo

Question

High-Low Method for a Service Company

Boston Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Boston Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.

Determine the variable cost per gross-ton mile and the fixed cost.

Transportation Costs Gross-Ton Miles January $614,200 246,000 February 684,800 275,000 March 484,000 178,000 April 656,600 266,000 May 550,700 214,000 June 706,000 289,000

Explanation / Answer

HIGH - LOW METHOD UNDER THIS METHOD, COSTS AT HIGHEST LEVEL OF ACTIVITY AND LOWEST LEVEL OF ACTIVITY ARE COMPARED TO FIND OUT VARIABLE AND FIXED COSTS PORTION VARIBLE COST PER UNIT= (COST AT HLA - COST AT LLA) HLA- LLA HLA IS HIGHEST LEVEL OF ACTIVITY I.E., 289000 GROSS TON MILES LLA IS LOWEST LEVEL OF ACTIVITY I.E., 178000 GROSS TONMILES VARIBLE COST PER UNIT= 706000-484000 289000-178000 = 2 FIXED COST = TOTAL COST - TOTAL VARIABLE COST AT 289000 GROSS TON MILES FIXED COST = 706000-(289000*2) = 128000

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