Question

Company Alpha has a contract with a delivery firm for delivering its products to their clients. The information regarding the monthly delivery costs for the second semester is available below:

Month	Units delivered	Delivery cost
July	180	$590
August	300	$950
September	250	$820
October	200	$640
November	230	$700
December	270	$870
Total	1,430	$4,570

Required:

Use the high-low method for estimating the cost function for monthly delivery costs for Company Alpha.

After reviewing the estimated cost function using the high-low method, the accountant at Company Alpha has noted that the estimated expenses do not exactly match the actual expenses for all months in the table above. Why is this happening?

Answer 1

Part 1) Calculating the estimated costs as per High Low method

Estimated variable cost per unit

=(Highest activity level cost - lowest activity level cost)/(Highest units - lowest units)

=(950- 590)/(300 - 180) = $3 per unit

Fixed cost =highest activity level cost - ( highest unit * variable cost per unit )

Fixed cost =950 - (300*3) =50

Calculation of total estimated monthly delivery cost for company

Months	Units delivered	Estimated costs
July	180	180*3 +50=590
Aug	300	300*3 +50=950
Sep	250	250*3 +50=800
Oct	200	200*3 +50=650
Nov	230	230*3 +50=740
Dec	270	270*3 +50=860
Total	1430	4590

Part 2)Actual delivery cost is not equal to estimated delivery cost as per high low cost method, since as per high low cost method Fixed cost is constant only for highest activity cost and lowest activity cost, for all other units , same varies