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High-Low Method

Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased with the number of appointments. Costs for this service over the past 8 months are as follows:

		Tanning
Month		Appointments			Total Cost
January		600			$1,750
February		1,900			$2,130
March		3,600			$2,830
April		2,500			$2,500
May		1,500			$1,700
June		2,400			$2,255
July		2,170			$2,300
August		2,900			$2,650

Required:

1. Which month represents the high point? The low point?

High point	JanuaryMarchMayJuneAugust
Low point	JanuaryFebruaryMarchAprilJune

In your calculations, round per unit costs to the nearest cent.

2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month. Round the variable rate per tanning appointment to the nearest cent and use it in your further calculations. Round the fixed cost per month to the nearest dollar and use it in your further calculations.

Variable rate for tanning	$fill in the blank 3 per tanning appointment
Fixed cost per month	$fill in the blank 4

3. Using the variable rate and fixed cost, what is the cost formula for tanning services?

Total tanning service cost = $2420 + ($0.37 x Number of appointments)Total tanning service cost = $2420 - ($0.37 x Number of appointments)Total tanning service cost = $1534 + ($0.36 x Number of appointments)Total tanning service cost = $1534 - ($0.36 x Number of appointments)

4. Calculate the total predicted cost of tanning services for September for 2,400 appointments using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September? How much is the total predicted variable cost for September? If required, round the final answers to the nearest dollar.

Total predicted cost for September	$fill in the blank 6
Total fixed cost for September	$fill in the blank 7
Total predicted variable cost for September	$fill in the blank 8

5. Which of the following statements is correct when luisa uses the high-low method to estimate the costs?

High-low method is based on only two data points and ignores all of the other data.

Luisa might be wise to calculate the cost formula 6 to 12 months later after a longer time period has elapsed since starting the tanning business.

It appears there is significant excess tanning bed capacity in slow months or machines are being run to their utmost capacity in busy months.

This might lead to greater machine breakdown and maintenance costs.All of the above.