Question

Kathy Smith, owner of Tulip Time, operates a local chain of floral shops. Each shop has its own delivery van. Instead of charging a flat delivery fee, Smith wants to set the delivery fee based on the distance driven to deliver the flowers. Smith wants to separate the fixed and variable portions of her van operating costs so that she has a better idea how delivery distance affects these costs. She has the following data from the past seven months:

Month	Miles Driven	Van Operating Costs
January	16,400	$5,480
February	17,500	$5,400
March	15,000	$4,950
April	16,100	$5,270
May	17,300	$5,740
June	15,600	$5,440
July	14,500	$4,680

Use the high-low method to determine Tulip Time's cost equation for van operating costs. Use your results to predict van operating costs at a volume of 16,000 miles.

Let's begin by determining the formula that is used to calculate the variable cost (slope).

____________________ / ____________________ = Variable cost (slope)

Answer 1

Change in cost / Change in volume = Variable cost (slope)
(Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity) = Variable cost per unit

(5,400-4,680)/(17,500 - 14,500)= Variable cost per unit

720/3,000= Variable cost (slope)
$0.24 per miles= Variable cost (slope)

Total operating cost -Total variable cost = Fixed cost

Highest activity cost - Highest activity x Variable cost per miles = Fixed cost

5,400 - 17,500 x 0.24= Fixed cost

5,700-4,200= Fixed cost

$1,500 = Fixed cost

Total Cost ,Predict van operating costs at a volume on 16,000 miles= Variable cost per mile x Activity +Fixed cost

= 0.24 x 16,000 +1,500

= 3,840+1,500

= $5,340