Question

The administrator of a car dealership wants to know the fixed and variable component of the costs of the repair department. It provides you with the following 6-month information:

	Repair hours	A total repair cost
January	1000	$8,000
Febrary	2000	$11,000
March	1500	$9,000
April	1200	$9,000
May	1800	$10,500
June	2500	$12,500

Each car you repair takes an average of 10 hours. If in the month of July it is expected to have 14 cars in repairs, using the high point - low point method determine for July:

Variable unit cost per hour:_________

Total fixed cost:_________

Total variable cost in July:_________

Variable unit cost per car in January:_________

Answer 1

All amounts are in $

High low method means we compare the costs incurred at highest and lowest activity and find out the Variable cost per unit and fixed cost

Highest activity point 2,500 hours = 12,500

Lowest activity point 1,000 hours = 8,000

1. Variable cost per hour = (12,500-8,000)/(2,500-1,000)

= 3 per hour

2. Total Fixed Cost = 8,000 - 1,000 x 3 = $5,000

3. Total Variable cost for July = 14 cars x 10hrs x $3 = $420

4. Variable unit cost per car = Variable unit cost per hour x average hours

= $3 x 10 hours

= $30

Note :

It is confusing in the question as the July's card are 14. Which is almost 90% below the usual monthly cars level. In June 250 cars (2,500 hours/10 hours average) while in July it is given as 14 hours