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		9,290			350
	February		6,800			410
	March		7,331			430
	April		7,940			320
	May		9,587			380
	June		8,290			300
	July		10,732			490
	August		7,300			270

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 = $ + ($ × Employee hours)

Answer 1

2.

Variable cost per employee hour = (Highest activity cost – Lowest activity cost)/(Highest activity employee hour – Lowest activity employee hour)

= (10,732 - 7,300)/(490 - 270)

= 3,432/220

= $15.6

1.

Fixed cost of labor = Highest activity cost – (Variable cost per employee hour x Highest activity employee hour)

= 10,732 - (15.6 x 490)

= 10,732 - 7,644

= $3,088

3.

Total labor cost = Fixed cost + (Variable cost per employee hour x Employee hours )

= 3,088 + (15.6 x Employee hours)