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		18,060		330
March		19,250		370
April		18,050		410
May		19,345		400
June		19,500		450
July		19,670		460
August		20,940		570
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
Month with low number of purchase orders

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

Fixed costMixed costMonthsPurchase ordersUnitsVariable rate )

5. If Dohini Manufacturing Company estimates that next month will have 440 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 5,350 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?

1. because there are more purchasing orders.

2. because there are more than 12 months in a year

3. because the high-low method can no longer be used.

4. it is the same.