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Course name: Summer ACCT2218
Assignment name: Ch 19 ** BluePrint** (12pts)
Cost-Volume-Profit
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Total Time spent: 16 hours, 53 minutes, 36 seconds
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Blueprint Problem: Cost Behavior and CVP Analysis - Mixed costs
and the high-low
method
Mixed Costs
There are several ways to analyze mixed costs. First, you must
be able to identify mixed
cost and distinguish it from costs that have only fixed cost or
variable cost
characteristics. In the following table, identify which cost is
described by each of the given
scenarios.
Scenario
A housekeeper makes $10 dollars per hour to clean hotel
rooms.Variable Cost
A cell phone plan costs $500 plus $0.50 for every minute of
usage over
2,000 minutes.Mixed Cost
A widget factory pays $5 per widget on material costs.Variable
Cost
A car lease costs $10,000 plus $5 for every mile driven over
10,000.Mixed Cost
Rent expense for a factory costs $20,000 per month.Fixed
Cost
A widget factory buys a new machine with annual depreciation
of
$8,000.Fixed Cost
A farmer has a contract with a grocery chain that pays
$5,000Mixed Cost
Question: wrfm11h/1Blueprint Problem: Cost Behavior and CVP
Analysis - Mixed costs and the high-lowmethodBlueprint Problem:
Cost Behavior and CVP Analysis - Mixed costs and the high-low
method
1. 1.50
2. 1.50
3. 1.50
4. 1.50
5. 1.50
6. 1.50
7. 1.50
8. 1.50
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guaranteed money plus $2 for every bushel of produce above
50,000
bushels.
Correct
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Find the mixed costs, where there is both a fixed component
(which does not
change with level of production) and a variable component (which
does with level
of production).
The High-Low Method
The high-low method is the most basic method used for analyzing
mixed costs. The
purpose of this analysis is to estimate the fixed and variable
cost components of mixed
costs by comparing mixed costs at different levels along the
relevant range for the
appropriate activity base. Conduct a cost analysis for the
following business using the
high-low method.
The following table contains data for Van Haren Lawns, a
landscaping business.
Month Lawns Mowed Total Cost
April 900 $44,400
May 740 41,840
June 1,200 49,200
July 1,300 50,800
August 1,700 57,200
For this business, the activity base is lawns mowed , and
the
relevant range is 740 lawns 1,700 lawns.
Correct
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To determine the activity base, consider which column represents
what the
company is primarily in business to do.
APPLY THE CONCEPTS: Use the high-low method to conduct a cost
analysis
Conduct a cost analysis for Van Haren Lawns, a landscaping
business, using the high-low
method. First, calculate the difference between the levels of
activity and total cost at its
highest and lowest levels. Enter all amounts as positive
numbers.
Lawns Mowed Total Cost
Highest level1700 $ 57200
Lowest level
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740 $ 41840
Difference960 $ 15360
The total fixed cost for a business does not change with changes
in
activity levels. This means that the difference in total cost
between the highest and
lowest activity levels in the amount of $ 15360 is the change in
variable
cost.
Correct
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Copy the lowest and highest levels of production and the
associated cost from
the table above, and then compute the difference of each column
between high
and low.
Calculating the Variable Cost per Unit, Using the High-Low
Method
Next, calculate the variable cost per unit, using the high-low
values. The variable cost per
unit , or in this case, the variable cost per lawn, is used to
find the fixed cost.
Variable Cost per Lawn = ?
Variable Cost per Lawn = $15360 = 16 per Lawn
960 Lawns
Correct
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The variable cost per unit is calculated by dividing the
difference between the
costs associated with the highest and lowest activity levels by
the difference in
activity of the highest and lowest activity levels.
Calculating Fixed Cost
The fixed cost at any given level of activity can now be
estimated. By selecting either the
high or the low set of data and using the previously calculated
variable cost per unit of
billable data in the formula for a straight line Y = fc + (vc x
Units), where fc is fixed
costs and vc is variable cost per unit the total fixed costs can
be determined.
Fixed Cost = ?
Highest level (1,700 lawns)
Fixed Cost = $57200 ( $ 16 per lawn x 1,700)
Fixed Cost =
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$30000
Lowest level (740 lawns)
Fixed Cost = $41840 ( $ 16 per lawn x 740)
Fixed Cost = $30000
Correct
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Use basic algebra to solve the equation for fc.
Determining the Total Cost Formula
Now that the fixed and variable cost elements are known,
determine the formula that
mathematically displays the calculation of total cost with mixed
cost elements.
Total Cost = ?
Total Cost = $30000 + ( $ 16 x Activity Level)
After determining the formula for total cost, calculate what the
total cost would be if the
company were to have an activity level of 1,500 lawns.
Total Cost = $30000 + ($ 16 x 1,500)
= $54000
Correct
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Now that you know fc, you can use the original formula to
compute the total cost
Y:
Y = fc + (vc x Units)
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wrfm11h/1Blueprint Problem: Cost Behavior and CVP Analysis -
Mixed costs and the high-lowmethodBlueprint Problem: Cost Behavior
and CVP Analysis - Mixed costs and the high-low method
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