Answer:
a) Fixed costs = $22,000
b) $70,000
c) The high low cost method is generally inaccurate because it only considers the extremes, the highest and lowest costs and activity levels. Generally costs are not linear, but they might follow a certain tendency. The advantages of the high low cost method is that it is fairly accurate when costs are stable, plus it is much simpler to calculate.
d) Assuming that costs follow a certain tendency, regression analysis is much more exact since it analyses the relationship between different data and different variables. When you analyze only 2 variables, a linear regression analysis will serve you. but if you need to analyse more than two variables, then you must use a multiple regression analysis.
The R² statistic basically measures how one variable's variance is affected by other variables. E.g. if R² is 0.75, then 75% of the variance of A will be explained by the variance of B.
Explanation:
variable cost using high low cost method = (highest activity cost - lowest activity cost) / (highest activity level - lowest activity level) = ($82,000 - $46,000) / (50,000 - 20,000) = $36,000 / 30,000 gallons of ice cream = $1.20 per gallon of ice cream
fixed costs = $82,000 - (50,000 x $1.20) = $22,000
40,000 gallons
$22,000 + (40,000 x $1.20) = $70,000
how regression analysis improves accuracy of high low cost method
