Question

The controller of Fortnight Co. has requested a quick estimate of the manufacturing supplies needed for the Cleveland Plant for the month of July, when production is expected to be 470,000 units to meet the ending inventory requirements and sales of 475,000 units. Fortnight Co.'s budget analyst has the following actual data for the last three months. Month Production in Units Manufacturing Supplies March 450,000 $723,060 April 540,000 853,560 May 480,000 766,560Using the high-low method to develop a cost estimating equation, the estimate of needed manufacturing supplies for July would be: (CMA adapted)

Answer 1

Answer:

Total cost= $752,060

Explanation:

To calculate the fixed and variable cost under the high-low method, we need to use the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (853,560 - 723,060) / (540,000 - 450,000)

Variable cost per unit=  $1.45

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 853,560 - (1.45*540,000)

Fixed costs= $70,560

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 723,060 - (1.45*450,000)

Fixed costs= $70,560

Now, the total cost for 470,000 units:

Total cost= 70,560 + 1.45*470,000

Total cost= $752,060