Question

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.Transportation Costs Gross-Ton MilesJanuary $1,776,000 560,000February 2,700,000 1,000,000March 1,650,000 500,000April 1,860,000 600,000May 1,440,000 400,000June 1,566,000 460,000Determine the variable cost per gross-ton mile and the total fixed cost.Variable cost (If required, round to two decimal places.) $ per gross-ton mileTotal fixed cost $

Answer 1

Answer:

(i) 2.1

(ii) $600,000

Explanation:

Transportation costs:

Highest activity = $2,700,000

Lowest activity =  $1,440,000

Change = $1,260,000

Gross tons miles:

Highest activity = $1,000,000

Lowest activity =  $400,000

Change = $600,000

Variable cost per gross ton mile:

= Change in transportation costs ÷ Change in gross ton miles

= $1,260,000 ÷ $600,000

= 2.1

Total cost = Fixed cost + (variable cost × gross ton miles)

$1,440,000 = Fixed cost + (2.1 × $400,000)

Fixed cost = $1,440,000 - $840,000

                 = $600,000