Question

Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period that...

Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period that Differs from the Data Period

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

 Month Labor Cost Employee Hours January \$7,100 340 February 9,999 530 March 8,240 610 April 9,887 590 May 8,590 460 June 7,631 330 July 9,590 550 August 7,550 290

Assume that this information was used to construct the following formula for monthly labor cost.

 Total Labor Cost = \$6,924 + (\$2.16 X Employee Hours)

Required:

Assume that 3,900 employee hours are budgeted for the coming year. Use the total labor cost formula to make the following calculations:

1. Calculate total variable labor cost for the coming year. Round your answer to the nearest dollar.
\$fill in the blank 1

2. Calculate total fixed labor cost for the coming year. Round your answer to the nearest dollar.
\$fill in the blank 2

3. Calculate total labor cost for the coming year. Round your answer to the nearest dollar.

Solution:

1. \$8,424

2. \$83,088

3. \$91,512

Explanation:

 Labour cost Employee hours High activity level 9,999 610 Low activity level 7,100 290 Change 2,899 (9999-7100) 320 (610-320) Variable cost 9.06 (2899/320) Total cost 7,100 Variable cost element 9.06 Fixed cost element 4473 7100 - (290 x 9.06)

Assume 3900 employee hours

Total labour cost = \$6,924 + (2.16 x employee hours) is given

Here

1. Variable labour cost = 2.16 x 3900 = 8,424

2. Fixed cost = 6924 x 12 = 83,088

3. Total labour cost = variable cost + fixed cost = 8424 + 83088 = 91,512

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