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Variable and Fixed Costs, Cost Formula, High-Low Method

Li Ming Yuan and Tiffany Shaden are the department heads for the accounting department and human resources department, respectively, at a large textile firm in the southern United States. They have just returned from an executive meeting at which the necessity of cutting costs and gaining efficiency has been stressed. After talking with Tiffany and some of her staff members, as well as his own staff members, Li Ming discovered that there were a number of costs associated with the claims processing activity. These costs included the salaries of the two paralegals who worked full time on claims processing, the salary of the accountant who cut the checks, the cost of claims forms, checks, envelopes, and postage, and depreciation on the office equipment dedicated to the processing. Some of the paralegals time appears to vary with the routine processing of uncontested claims, but considerable time also appears to be spent on the claims that have incomplete documentation or are contested. The accountants time appears to vary with the number of claims processed.

Li Ming was able to separate the costs of processing claims from the costs of running the departments of accounting and human resources. He gathered the data on claims processing cost and the number of claims processed per month for the past 6 months. These data are as follows:

Month		Claims Processing Cost			Number of Claims Processed
February		$34,907			5,700
March		31,260			4,900
April		37,950			6,100
May		38,250			6,500
June		44,895			7,930
July		44,055			7,514

Required:

3. Use the high-low method to find the fixed cost per month. $fill in the blank 11

Use the high-low method to find the variable rate. Round to two decimal places. $fill in the blank 12 per claim

What is the cost formula? Total cost of claims processing = $fill in the blank 13 + ( $fill in the blank 14 per unit

ClaimsFixed costsVariable costs

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