Question

Sherri's Tan-O-Rama is a local tanning salon. The following information reflects its number of appointments and total costs for the first half of the year:

Month	Number of Appointments	Total Cost
January	500	6,800
February	300	5,000
March	275	5,450
April	475	6,050
May	200	5,600
June	250	5,000

Using the high-low method, calculate the total fixed cost per month and the variable cost per tanning appointment. (Round your "Variable Cost per Unit" answer to 2 decimal places and "Fixed Cost" answer to the nearest dollar amount.)

Variable Cost per Unit
Fixed Cost

Answer 1

Ans. 1	High low method: This method is based on the highest level of cost and activity & the lowest level of cost and activity.
	We assumed that the highest units lead to highest cost and lowest units lead to lowest cost.
	Variable cost per unit = (Highest cost - Lowest cost) / (Highest machine hours - Lowest machine hours)
		($6,800 - $5,600) / (500 - 200)
		$1,200 / 300
		$4 per unit
Ans. 2	Fixed cost =   Total cost - (Variable cost per unit * Activity level)
	Fixed cost can be calculated on the base of highest and lowest units.
	Highest units	Lowest units
	$6,800 - ($4 * 500)	$5,600 - ($4 * 200)
	$6,800 - $2,000	$5,600 - $800
	$4,800	$4,800
	So the fixed cost   =   $4,800