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.

Required:

If required, round your answers to two decimal places and use the rounded answers in subsequent computations.

1. Determine the high point and the low point.

Month with high number of purchase orders	_________________
Month with low number of purchase orders	_________________

2. Calculate the variable rate for purchasing cost based on the number of purchase orders. $ _________________ 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.

Total purchasing cost

=

$ _________________

+

($ _________________

x

_________________ )

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?

_________________

2.

eBook

Cornerstone Exercise 3.8 Cumulative Average-Time Learning Curve

Pohlman Company makes aircraft engines. Pohlman has noticed that, in general, each new engine design is subject to an 80 percent learning rate. Assume that the first unit produced takes 500 hours, and direct labor is paid an average of $30 per hour.

Required:

1. Set up a table with columns showing: the cumulative number of units, cumulative average time per unit in hours, and cumulative total time in hours. Show results by row for total production of: one engine, two engines, four engines, eight engines, sixteen engines, and thirtytwo engines. If required, round your answers to two decimal places.

Cumulative Number of Units	Cumulative Average Time per Unit in Hours	Cumulative Total Time: Labor Hours
1	_________________	_________________
2	_________________	_________________
4	_________________	_________________
8	_________________	_________________
16	_________________	_________________
32	_________________	_________________

2. What is the total labor cost if Pohlman manufactures the following number of engines: one, four, or sixteen? For interim computations, carry amounts out to two decimal places. Round your final answers to the nearest dollar.

Cost for installing one engine	$ _________________
Cost for installing four engines	$ _________________
Cost for installing sixteen engines	$ _________________

What is the average cost per engine for the following number of engines: one, four, or sixteen? For interim computations, carry amounts out to two decimal places. Round your final answers to the nearest dollar.

Average cost per system for one engine	$ _________________
Average cost per system for four engines	$ _________________
Average cost per system for sixteen engines	$ _________________

3. What if Pohlman is preparing a bid to build 16 engines? If necessary, round your answers to both parts to the nearest dollar.

Calculate budgeted labor cost for an engine design which Pohlman has built before (assume that 16 of these engines had been made previously and the first unit took 500 hours).

$ _________________

Calculate budgeted labor cost for a new engine design that Pohlman's workers have never made before (assume the first unit will take 500 hours).

$ _________________

3.

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Exercise 3.9 Variable, Fixed, and Mixed Costs

Classify the following costs of activity inputs as variable, fixed, or mixed. Identify the activity and the associated activity driver that allow you to define the cost behavior. For example, assume that the resource input is