Question

Continental 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 Continental Railroad is a measure of railroad operating activity, termed "gross-ton miles," which is the total number of tons multiplied by the miles moved.
Transportation Costs Gross-Ton Miles

January $24,500,000 3,000,000

February 22,375,000 2,500,000

March 29,000,000 6,300,000

April 34,800,000 9,500,000

May 40,312,500 12,750,000

June 35,500,000 10,000,000


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

Answer 1

Answer:

$1.75 and $18,000,000

Explanation:

The computation of the fixed cost and the variable cost per  gross ton mile by using high low method is shown below:

Variable cost per gross ton mile = (High transportation cost - low transportation cost) ÷ (High  Gross-Ton Miles - low  Gross-Ton Miles)

= ($40,312,500 - $22,375,000) ÷ (12,750,000 miles - 2,500,000 miles)

= $17,937,500 ÷ 10,250 ,000 miles

= $1.75

Now the fixed cost equal to

= High operating cost - (High gross ton miles × Variable cost per gross ton mile)

= $40,312,500 - (12,750,000 miles × $23)

= $40,312,500 - $22,312,500

= $18,000,000

We simply applied the above formula