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Chapter 20: Q4RQ (page 1119)
What is the purpose of using the high-low method?
The purpose of using the high-low method is to split mixed cost into fixed cost and variable cost.
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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.
Scotty鈥檚 Scooters plans to sell a standard scooter for \(55 and a chrome scooter for \)70. Scotty鈥檚 purchases the standard scooter for \(30 and the chrome scooter for \)40. Scotty鈥檚 expects to sell one standard scooter for every three chrome scooters. Scotty鈥檚 monthly fixed costs are \(23,000.
Requirements
1. How many of each type of scooter must Scotty鈥檚 Scooters sell each month to break even?
2. How many of each type of scooter must Scotty鈥檚 Scooters sell each month to earn \)25,300?
3. Suppose Scotty鈥檚 expectation to sell one standard scooter for every three chrome scooters was incorrect and for every four scooters sold two are standard scooters and two are chrome scooters. Will the breakeven point of total scooters increase or decrease? Why? (Calculation not required.)
Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.
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.
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