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Chapter 20: Q3SE (page 1121)

Using the high-low method

Mark owns a machine shop. In reviewing the shop’s utility bills for the past 12 months, he found that the highest bill of \(2,600 occurred in August when the machines worked 1,200 machine hours. The lowest utility bill of \)2,300 occurred in December when the machines worked 600 machine hours.

Requirements

1. Use the high-low method to calculate the variable cost per machine hour and the total fixed utility cost.

2. Show the equation for determining the total utility cost for the machine shop.

3. If Mark anticipates using 800 machine hours in January, predict the shop’s total utility bill using the equation from Requirement 2.

Short Answer

Expert verified

1. Variable cost per units is $ 0.50 per machine hour

Total fixed cost is $2,000

2.Totalmixedcost=(Variablecostperunits×Numberofunits)+Totalfixedcost

3. Total mixed cost is $ 2,400


Step by step solution

01

Calculation of variable cost per machine hour and total fixed utility cost using high-low method.


Variablecostperunit=ChangeintotalcostChangeinvolumeactivity=(Costassociatedwithhigestvolume-Costassociatedwithlowestvolume)(Highestvolume-Lowestvolume)=($2,600-$2,300)(1200-600)=($300)($600)=$0.50permachinehour

Totalfixedcost=Totalmixedcost-Totalvariablecost=Totalmixedcost-(Variablecostperunit×Numberofunits)=$2,600-($0.50×1200)=$2,600-$6,00=$2,000

02

equation for determining the total utility cost for the machine shop.

Totalmixedcost=(Variablecostperunit×Numberofunits)+Totalfixedcost

03

Calculation of shop’s total utility bill using equation in step 2.

Totalmixedcost=(Variablecostperunit×Numberperunits)+Totalfixedcost=($0.50×800machinehoure)+$2,000=$400+$2,000=$2,400

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Most popular questions from this chapter

What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.

Question: Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

S20-10 Computing contribution margin per unit, breakeven point in sales units

Compute the contribution margin per unit and the number of tickets Funday Park must sell to break even. Perform a numerical proof to show that your answer is correct.

Question: Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

Compute Funday Park’s contribution margin ratio. Carry your computation to two decimal places. Use the contribution margin ratio approach to determine the sales revenue Funday Park needs to break even

Question: Gilbert’s Steel Parts produces parts for the automobile industry. Thecompany has monthly fixed costs of \(640,220 and a contribution margin of85% of revenues.

Requirements

1. Compute Gilbert’s monthly breakeven sales in dollars. Use the contributionmargin ratio approach.

2. Use contribution margin income statements to compute Gilbert’s monthlyoperating income or operating loss if revenues are \)500,000 and if they are$1,050,000.

3. Do the results in Requirement 2 make sense given the breakeven sales youcomputed in Requirement 1? Explain.

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

S20-14 Computing margin of safety

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the margin of safety in tickets and in sales dollars.
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