1. High-Low Method to Determine Fixed Cost and Variable Rate

   Dohini Manufacturing Company had the following 12 months of data on purchasing cost and number of purchase orders.

   Month		Purchasing Cost		Number of Purchase Orders
   January		$18,860		370
   February		18,065		330
   March		19,250		370
   April		18,050		410
   May		19,345		400
   June		19,500		450
   July		19,670		460
   August		20,940		560
   September		19,430		440
   October		20,020		500
   November		18,800		470
   December		19,340		480

   Required:

   1. Determine the high point and the low point.

   Month with high number of purchase orders	August January February March April May June July August September October November December
   Month with low number of purchase orders	February January February March April May June July August September October November December

   2. Calculate the variable rate for purchasing cost based on the number of purchase orders. (Round to the nearest cent.) $ per purchase order

   3. Calculate the fixed monthly cost of purchasing. $

   4. Write the cost formula for the purchasing activity showing the fixed cost and the variable rate. Round variable rate to the nearest cent.

   Total purchasing cost

   =

   $

   +

   ($

   x

   Purchase orders Fixed cost Mixed cost Months Purchase orders Units Variable rate )

   5. If Dohini Manufacturing Company estimates that next month will have 430 purchase orders, what is the total estimated purchasing cost for that month?

   $

   6. What if Dohini Manufacturing wants to estimate purchasing cost for the coming year and expects 5,340 purchase orders? What will estimated total purchasing cost be? $

   What is the total fixed purchasing cost? $

   Why doesn't it equal the fixed cost calculated in Requirement 3 above?

   • because there are more purchase orders
   • because there are 12 months in the year
   • because the high-low method can no longer be used
   • it is the same

   Feedback

   1. Recall that the high point is the point with the highest output or driver level.

   2. Recall that the low point is the point with the lowest output or driver level.

   3. Variable rate = (High cost Low cost)/(High purchase orders Low purchase orders)

   4. Fixed cost = Total cost (Variable rate Purchase orders)

   5.