Question

High-Low Method for a Service Company

Boston Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Boston Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.

	Transportation Costs		Gross-Ton Miles
January	$614,200		246,000
February	684,800		275,000
March	484,000		178,000
April	656,600		266,000
May	550,700		214,000
June	706,000		289,000

Determine the variable cost per gross-ton mile and the fixed cost.

Variable cost (Round to two decimal places.)	$ per gross-ton mile
Total fixed cost

Answer 1

HIGH - LOW METHOD
UNDER THIS METHOD, COSTS AT HIGHEST LEVEL OF
ACTIVITY AND LOWEST LEVEL OF ACTIVITY ARE
COMPARED TO FIND OUT VARIABLE AND FIXED COSTS
PORTION
VARIBLE COST PER UNIT=		(COST AT HLA - COST AT LLA)
		HLA- LLA
HLA IS HIGHEST LEVEL OF ACTIVITY I.E., 289000 GROSS TON MILES
LLA IS LOWEST LEVEL OF ACTIVITY I.E., 178000 GROSS TONMILES
VARIBLE COST PER UNIT=		706000-484000
		289000-178000
=		2
FIXED COST = TOTAL COST - TOTAL VARIABLE COST
AT 289000 GROSS TON MILES
FIXED COST =	706000-(289000*2)
=	128000