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Chapter 20: Q23E (page 1125)

Determining mixed costs鈥攖he high-low method

The manager of Trusty Car Inspection reviewed the monthly operating costs for the past year. The costs ranged from \(4,300 for 1,300 inspections to \)3,900 for 900 inspections.

Requirements

1. Use the high-low method to calculate the variable cost per inspection.

2. Calculate the total fixed costs.

3. Write the equation and calculate the operating costs for 1,000 inspections.

4. Draw a graph illustrating the total cost under this plan. Label the axes, and show the costs at 900, 1,000, and 1,300 inspections.

Short Answer

Expert verified
  1. Variable cost per inspection is $1.
  2. Fixed cost is$3,000
  3. Operating cost at 1,000 inspections is $4,000
  4. Graph shown below

Step by step solution

01

Calculation of variable cost per inspection

Variablecostperinspection=ChangeintotalcostChangeinvolumeofactivity=$4,300-$3,9001,300-900=$400400=$1

02

Calculation of fixed cost

Fixedcost=Totalmixedcost-Totalvariablecost=$4,300-($1脳1,300inspections)=$4,300-$1,300=$3,000

03

Calculation of operating cost for 1,000, 900, 1,300 inspections

Operating鈥�cost=Fixed鈥�cost+1000鈥�inspections脳Variable鈥�cost鈥�per鈥�inspection=$3,000+1,000脳$1=$4,000

Operating鈥�cost=Fixed鈥�cost+900鈥�inspections脳Variable鈥�cost鈥�per鈥�inspection=$3,000+900脳$1=$3,900

Operating鈥�cost=Fixed鈥�cost+1300鈥�inspections脳Variable鈥�cost鈥�per鈥�inspection=$3,000+1,300脳$1=$4,300

04

Graph

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Most popular questions from this chapter

Question: Determining total mixed cost

John Street Barber Shop pays \(25 per month for water for the first 8,000 gallons and \)3.50 per thousand gallons above 8,000 gallons. Calculate the total water cost when the barber shop uses 7,000 gallons, 10,000 gallons, and 13,000 gallons.

No Slip Co. produces sports socks. The company has fixed costs of\(91,080 and variable costs of \)0.81 per package. Each package sells for $1.80.

Requirements

1. Compute the contribution margin per package and the contribution marginratio. (Round your answers to two decimal places.)

2. Find the breakeven point in units and in dollars using the contributionmargin approach.

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are \(170,800 per month.

Refer to the original information (ignoring the changes considered in Short Exercise S20-12). Suppose Funday Park increases fixed costs from \)170,800 per month to $231,000 per month. Compute the new breakeven point in tickets and in sales dollars.

What are the three ways contribution margin can be ex

Computing margin of safety

Robbie鈥檚 Repair Shop has a monthly target profit of \(31,000. Variable costs are 20%of sales, and monthly fixed costs are \)19,000.

Requirements

1. Compute the monthly margin of safety in dollars if the shop achieves its income goal.

2. Express Robbie鈥檚 margin of safety as a percentage of target sales.

3. Why would Robbie鈥檚 management want to know the shop鈥檚 margin of safety?
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