Question

Pleasant Pools Inc. has the following shipping costs for the last 6 months. Month Km. cost...

Pleasant Pools Inc. has the following shipping costs for the last 6 months.

Month Km. cost
April. 20,000. $11,000

May. 38,000. $15,000

June 42,000. $20,000

July 40,000 $17,000

August 45,000. $21,000

Sep. 32,000. $18,000

Required:

  1. Using the High Low Method, develop a cost equation for the shipping costs for Pleasant Pools Inc.
  2. Describe what a mixed cost is and explain why this problem demonstrates mixed costs.
Business   Accounting   
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Homework Answers

Answer #1

Variable cost per km = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (21,000-11,000)/(45,000-20,000)

= 10,000/25,000

= 0.4 per km

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

= 21,000- 45,000 x 0.4

= 21,000-18,000

= $3,000

Cost equation = fixed cost + Variable cost per km x Number of km

= 3,000+ 0.4 x Number of km

A mixed cost is a costs in which some portion is fixed and some portion is variable. In the given problem, total shipping cost is a mixed cost since $3,000 of the shipping cost is a fixed cost and remaining cost is variable with respect to the number of kilo meters.

Kindly comment if you need further assistance. Thanks

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