Question

1. Supply costs at Coulthard Corporation's chain of gyms are listed below:

	Client-Visits				Supply Cost
March		11,667			$	28,349
April		11,463			$	28,298
May		11,995			$	28,431
June		14,000			$	28,932
July		11,727			$	28,364
August		11,213			$	28,235
September		12,007			$	28,434
October		11,698			$	28,357
November		11,846			$	28,394

Management believes that supply cost is a mixed cost that depends on client-visits. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first, rounding off to the nearest whole cent. Then compute the fixed component, rounding off to the nearest whole dollar. Those estimates are closest to: (Round your intermediate calculations to 2 decimal places.)

2. Serfass Corporation's contribution format income statement for July appears below:

Sales	$	390,000
Variable expenses		175,500
Contribution margin		214,500
Fixed expenses		77,220
Net operating income	$	137,280

The degree of operating leverage is closest to:

Answer 1

Answer to question -1:

Calculation of the variable and fixed components of cost using the high-low method :

Variable cost per unit = (Supply cost for higher client visits - Supply cost for the lower client visit) / (No. of Highest client visit - No. of lowest client visit)

= ($28,932 - $28,235) / (14,000 - 11,213)

= $697 / 2,787

= $0.25 per client visit

Fixed Cost = $28,932 - (14,000 x $0.25 per client visit)

= $25,432

Accordingly, the variable & fixed cost component are closest to $0.25 per client visit & $25,432 respectively.

Answer to question -2:

Calculation of degree of operating leverage of Serfass Corporations:

Degree of operating leverage = Contribution / Net operating income

= $214,500 / $137,280

= 1.5625

Accordingly, the degree of operating leverage is closest to 1.5625.