High-Low Method for Service Company Blowing Rock Railroad decided to use the hig

Question

High-Low Method for Service Company

Blowing Rock 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 Blowing Rock 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 $1,080,600 279,000 February 1,204,800 312,000 March 851,500 202,000 April 1,155,200 302,000 May 968,800 243,000 June 1,242,100 328,000

Explanation / Answer

High - low method for service company is as follows

1 : Select the activity(gross ton mile) with the highest and lowest amounts

In the above table we have highest for June month it is 328,000 gross-ton miles, and lowest for march it is 202,000.

2 : The corresponding values of transportation costs are 1,242,100 for june and 851,500 for the march month.

3 : Now find the slope of the that is the variable cost per unit length

Variable cost, VC = ($1,242,100 - $851,500)/(328,000 - 202,000)

= $3.1 per unit gross ton mile

4 : To know total fixed cost we have formula

TC = VC(x) + TFC

where TC is the total cost and it is the cost related to x

VC is the variable cost

TFC is the total fixed cost

x is the high gross ton miles

There fore we can write the above equation as 1,242,100 = (3.1)*(328,000) + TFC

TFC = $225,300

So the answers are

Variable cost (Round to two decimal places) = 3.10 $ per gross-ton mile

Total fixed cost = $225,300

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