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Chapter 20: Q5RQ (page 1119)

Describe the three steps of the high-low method.

Short Answer

Expert verified

Step 1: Calculation of variable cost per unit

Step 2: Calculation of fixed cost

Step 3: Creation and use of equation

Step by step solution

01

First step of high-low method

The first step of high-low method is to identify the highest and lowest level of activity and then calculate the variable cost per unit.

02

Next step is to calculate the fixed cost

Fixed cost can be calculated by subtracting variable cost calculated above from total mixed cost.

03

Third and the last step of high-low method is creation of equation of mixed cost

Total mixed cost = (Variable cost per unit x Number of units) +Total fixed cost

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Most popular questions from this chapter

Diversified Investor Group is opening an office in Boise, Idaho. Fixed monthly costs are office rent (\(8,000), depreciation on office furniture (\)1,700), utilities (\(2,400), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)11,900). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements

  1. Use the contribution margin ratio approach to compute Diversified鈥檚 breakeven revenue in dollars. If the average trade leads to \(800 in revenue for Diversified, how many trades must be made to break even?
  2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)11,200.
  3. Graph Diversified鈥檚 CVP relationships. Assume that an average trade leads to \(800 in revenue for Diversified. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)11,200 is earned.
  4. Suppose that the average revenue Diversified earns increases to $2,000 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

Question: Why is the calculation to determine the target profit considered a variation of the breakeven calculation?

National Investor Group is opening an office in Portland, Oregon. Fixed monthly costs are office rent (\(8,100), depreciation on office furniture (\)1,700), utilities (\(2,000), special telephone lines (\)1,500), a connection with an online brokerage service (\(2,500), and the salary of a financial planner (\)5,200). Variable costs include payments to the financial planner (9% of revenue), advertising (11% of revenue), supplies and postage (4% of revenue), and usage fees for the telephone lines and computerized brokerage service (6% of revenue).

Requirements

  1. Use the contribution margin ratio approach to compute National鈥檚 breakeven revenue in dollars. If the average trade leads to \(1,000 in revenue for National, how many trades must be made to break even?
  2. Use the equation approach to compute the dollar revenues needed to earn a monthly target profit of \)12,600.
  3. Graph National鈥檚 CVP relationships. Assume that an average trade leads to \(1,000 in revenue for National. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, the operating income area, and the sales in units (trades) and dollars when monthly operating income of \)12,600 is earned.
  4. Suppose that the average revenue National earns increases to $1,500 per trade. Compute the new breakeven point in trades. How does this affect the breakeven point?

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.

What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
See all solutions

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