Question

High-Low Method: 1) Surplus Company manufacturers parts for old Army Hummers. The following data is presented for the 4 weeks in June:

Week 1 – 2,000 units produced, $3,000 depreciation (fixed), $1,000 indirect labor (fixed), $5,000 utilities cost (semivariable), and $4,000 factory supplies (variable).

Week 2 – 3,000 units produced, $3,000 depreciation (fixed), $1,000 indirect labor (fixed), $7,000 utilities cost (semivariable), and $6,000 factory supplies (variable).

Week 3 – 2,500 units produced, $3,000 depreciation (fixed), $1,000 indirect labor (fixed), $6,000 utilities cost (semivariable), and $5,000 factory supplies (variable).

Week 4 – 2,000 units produced, $3,000 depreciation (fixed), $1,000 indirect labor (fixed), $5,000 utilities cost (semivariable), and $4,000 factory supplies (variable).

a) Use the high-low method to determine the formula the company can use to forecast future production rates.

b) The company expects an influx of orders. Calculate the estimated semivariable cost if the influx was 6,000 units.

Answer 1

Using the HIgh - Low method ........... we have to segregate the semi variable cost into variable part and fixed part. Then use that information to construct a mathemetical relationship between total cost and production volume (Units).

Highest volume = 3000 Units and lowest is 2000 Units ............ Hence the difference = 1000 Units

Semi variable cost is .......... 7000 and 5000 respectively ........ so difference is = $ 2000

Variable cost per unit = Difference in cost / Difference in Units

= 2000 / 1000 = $ 2 per Units.

At 3000 Units, we have total cost = 7000. Of which 3000 * 2 = 6000 is the variable cost and rest 1000 is fixed cost.

If Y = Semi variable cost and X = Number of units then the equation for estimating semi variable cost is.............

Y = 2X + 1000

Question - 2

Semi variable cost at 6000 Units = 2 * 6000 + 1000 = 13000