Question

High-Low Method for a Service Company

Boston Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Boston Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.

	Transportation Costs		Gross-Ton Miles
January	$1,452,500		387,000
February	1,619,400		432,000
March	1,144,500		280,000
April	1,552,600		419,000
May	1,302,200		337,000
June	1,669,500		455,000

Determine the variable cost per gross-ton mile and the fixed cost.

Variable cost (Round to two decimal places.)	$ per gross-ton mile
Total fixed cost	$

Answer 1

Variable cost = [Transportation cost at highest gross ton miles-Transportation cost at lowers gross ton miles]/[Highest gross ton miles -Lowest gross ton miles]
= (1669500-1144500)/(455000-280000) =	$                 3.00	Per gross ton mile
Fixed cost = Transportation at highest gross ton miles-Highest gross ton mile*Variable cost per gross ton mile = 1669500-455000*3 =	$         3,04,500