Question

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.

Answer 1

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