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Chapter 20: Q5RQ (page 1119)

Describe the three steps of the high-low method.

Short Answer

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Step 1: Calculation of variable cost per unit

Step 2: Calculation of fixed cost

Step 3: Creation and use of equation

Step by step solution

01

First step of high-low method

The first step of high-low method is to identify the highest and lowest level of activity and then calculate the variable cost per unit.

02

Next step is to calculate the fixed cost

Fixed cost can be calculated by subtracting variable cost calculated above from total mixed cost.

03

Third and the last step of high-low method is creation of equation of mixed cost

Total mixed cost = (Variable cost per unit x Number of units) +Total fixed cost

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Most popular questions from this chapter

On the CVP graph, where is the breakeven point shown? Why?

Question: Why is the calculation to determine the target profit considered a variation of the breakeven calculation?

Preparing a contribution margin income statement

Gabelman Company sells a product for \(95 per unit. Variable costs are \)40 per unit, and fixed costs are $2,200 per month. The company expects to sell 570 units in September. Prepare an income statement for September using the contribution margin format

Calculating contribution margin

Glenn Company sells a product for \(80 per unit. Variable costs are \)60 per unit, and fixed costs are $800 per month. The company expects to sell 560 units in September. Calculate the contribution margin per unit, in total, and as a ratio.

England Productions performs London shows. The average show sells 1,300 tickets at\(60 per ticket. There are 175 shows per year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of65, each earning a net average of \)340 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)728,000.

Requirements

1. Compute revenue and variable costs for each show.

2. Use the equation approach to compute the number of shows England Productionsmust perform each year to break even.

3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $5,687,500. Is this profit goal realistic? Giveyour reasoning.

4. Prepare England Productions’s contribution margin income statement for175 shows performed in 2018. Report only two categories of costs: variableand fixed.
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