Question

May Day Florists is an on-line order and delivery flower shop. The company has tracked their mixed costs overhead costs for the first 6 months of the year. May Day wants to be able to estimate these overhead costs for different levels of activity of the business. The number of orders and overhead costs for 6 months are provided in the table below.

Month	Number of Orders	Overhead Costs
January	150	$2,575
February	475	$3,875
March	200	$2,950
April	275	$3,000
May	225	$3,200
June	180	$2,450

Required:

1. Estimate the variable cost per unit using the high-low method.
2. Provide the equation May Day would use to estimate total overhead costs based the estimated variable cost found in a above.
3. As May Day has been more successful than they anticipated they are hoping to expand the number of orders for the remainder of the year. The company anticipates orders in December to reach 550 orders. What would be the expected overhead costs at 550 orders?
4. In your opinion is the high-low method the best method for estimating the variable cost per unit? Explain your opinion. No marks will be given for a simple yes or no answer.

Answer 1

a.

Variable cost per unit = $3,875 - $2,575 / 475 - 150

Variable cost per unit = $1,300 / 325 = $4

Fixed cost = $3,875 - 1,900(475*$4) = $1,975

b.

Let X be the number of orders

Total cost = $1,975 + $4 *X

c.

Total overhead cost = $1,975 + $4*550

Total overhead cost = $1,975 + $2,200 = $4,175

d.

High low method is an easy method to separate variable cost and fixed cost. However theree are other cost method such as least square regression method which are better than high low method but is complex in calculation.