Question

Alden Co.’s monthly unit sales and total cost data for its operating activities of the past year follow. Management wants to use these data to predict future fixed and variable costs.
Month Units Sold Total Cost Month Units Sold Total Cost
1 318,000 $155,500 7 362,000 $292,624
2 163,000 99,250 8 268,000 149,750
3 263,000 203,600 9 76,400 67,000
4 203,000 98,000 10 148,000 128,625
5 288,000 199,500 11 92,000 92,000
6 188,000 110,000 12 98,000 83,650
Estimate both the variable costs per unit and the total monthly fixed costs using the high-low method. (Do not round intermediate calculations.)

Answer 1

Answer:

Alden Co.

Prediction of Future Fixed and Variable Costs, using the high-low method:

a) Determination of the Variable Cost:

7               362,000        $292,624

9                 76,400           $67,000

               285,600         $225,624

Variable cost per unit = $225,624/285,600 = $0.79

Fixed Costs = $76,000 - (76,400 x $0.79) = $15,644

Explanation:

Month     Units Sold       Total Cost

  1                318,000       $155,500  

 2               163,000           99,250  

 3              263,000         203,600  

4               203,000           98,000  

5               288,000         199,500  

6                188,000          110,000  

7               362,000        292,624

8               268,000          149,750

9                 76,400           67,000

10              148,000         128,625

11               92,000           92,000

12              98,000           83,650

The High-Low Method of determining costs can be relatively accurate if the highest and lowest activity levels represent the overall cost behavior of the company.  Inaccurate results will be obtained when the two extreme activity levels are significantly unrepresentative of the dataset.  This is exactly the case in this example.  If you try to estimate fixed cost, at another activity level, you will get a different result.  So the high-low method is not ideal in most cases and its results should not be relied on solely.  A better method is to do a regression analysis with the dataset to obtain a more accurate result.