Question

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and construct a cost function

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

Month	Labor Cost	Employee Hours
January	9,590	490
February	7,100	570
March	7,631	610
April	8,240	460
May	9,887	530
June	8,590	420
July	12,460	680
August	7,600	380

Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant. In your calculations, round the variable rate per employee hour to the nearest cent. If required, round your final answers to the nearest cent.

Required:

1. Using the high-low method, calculate the fixed cost of labor.

$_______________

2. Using the high-low method, calculate the variable rate.

$_______________ per employee hour.

3. Using the high-low method, construct the cost formula for total labor cost.

Total labor cost= $ _____________+($______________ x employee hours)

Answer 1

1)	Fixed Cost		=	Total Cost - (Highest emp. Hours x variable cost per employee hour)
			=	$ 12460 - (680 x $ 16.20)
			=	$ 1,444.00

2)	Variable Cost		=	(Relevant Cost of Highest Emp. Hours - Relevant Cost of Lowest Emp. Hours) / (Highest Emp. Hours - Lowest Emp. Hours)
			=	($ 12460 - $ 7600) / (680 - 380)
			=	$      16.20 per employee hour

3)

Total Labor Cost

=

$ 1444 + ($ 16.20 x employee hours)

Workings:

Highest employee hours			680
Relevant cost			$ 12,460.00
Lowest employee hours			380
Relevant cost			$   7,600.00