Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period that Differs from the Data Period

Speedy Petes is a small start-up company that delivers high-end coffee drinks to large metropolitan office buildings via a cutting-edge motorized coffee cart to compete with other premium coffee shops. Data for the past 8 months were collected as follows:

Month	Delivery Cost	Number of Deliveries
May	$63,450	1,800
June	67,120	2,010
July	66,990	2,175
August	68,020	2,200
September	73,400	2,550
October	72,850	2,630
November	75,450	2,800
December	73,300	2,725

Assume that this information was used to construct the following formula for monthly delivery cost.

Total Delivery Cost = $41,850 + ($12.00 Number of Deliveries)

Required:

Assume that 3,000 deliveries are budgeted each month for the coming year. Use the total delivery cost formula to make the following calculations:

1. Calculate total variable delivery cost for the coming year. $

2. Calculate total fixed delivery cost for the year. $

3. Calculate total delivery cost for the year. $

Cost Behavior, Classification

Smith Concrete Company owns enough ready-mix trucks to deliver up to 120,000 cubic yards of concrete per year (considering each truck's capacity, weather, and distance to each job). Total truck depreciation is $250,000 per year. Raw materials (cement, gravel, and so on) cost about $51 per cubic yard of cement.

Required:

1. On your own paper, prepare a graph for truck depreciation. Use the vertical axis for cost and the horizontal axis for cubic yards of cement. Select the following amounts from the graph.

Depreciation cost of truck if it delivers 30,000 cubic yards of concrete in one year. $

Depreciation cost of truck if it delivers 70,000 cubic yards of concrete in one year. $

2. On your own paper, prepare a graph for raw materials. Use the vertical axis for cost and the horizontal axis for cubic yards of cement. Select the following amounts from the graph.

Cost of raw materials for 2,000 cubic yards of concrete. $

Cost of raw materials for 5,000 cubic yards of concrete. $

3. Assume that the normal operating range for the company is 90,000 to 96,000 cubic yards per year. Classify truck depreciation and raw materials as variable or fixed costs.

Truck depreciation	Fixed
Raw materials cost	Variable

4. What action could Smith management take to reduce the truck depreciation cost from year to year.

5. What action could Smith management take to reduce the total raw materials cost from year to year.

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		700			$1,755
February		2,000			$2,110
March		3,200			$2,780
April		2,500			$2,400
May		1,500			$1,700
June		2,200			$2,275
July		2,120			$2,300
August		3,100			$2,650

Required:

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

High point	March
Low point	January

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	$ per tanning appointment
Fixed cost per month	$

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

4. Calculate the total predicted cost of tanning services for September for 2,500 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	$
Total fixed cost for September	$
Total predicted variable cost for September	$

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

Method of Least Squares, Developing and Using the Cost Formula

The method of least squares was used to develop a cost equation to predict the cost of receiving purchased parts at a video game manufacturer. Ninety-six data points from monthly data were used for the regression. The following computer output was received:

Intercept	190,300
Slope	345

The cost driver used was number of parts inspected.

Required:

1. What is the cost formula?

Total cost of receiving = $ + ( $ Number of parts inspected )

2. Using the cost formula from Requirement 1, identify each of the following: independent variable, dependent variable, Variable rate per professional hour, and fixed cost per month.

Independent variable	Number of parts inspected
Dependent variable	Total cost of receiving
Variable rate per professional hour	$345	per part inspected
Fixed cost per month	$190,300

3. Using the cost formula, predict the cost of receiving for a month in which 8,800 parts are inspected.

Total cost of receiving = $

Identifying the Parts of the Cost Formula; Calculating Monthly, Quarterly, and Yearly Costs Using a Cost Formula Based on Monthly Data

Gordon Company's controller, Eric Junior, estimated the following formula, based on monthly data, for overhead cost:

Overhead Cost = $232,000 + ($58 x Direct Labor Hours)

Required:

1. Select the term in the right column that corresponds to the term in the left column.

Overhead cost	Dependent variable
$232,000	Fixed cost (intercept)
$58	Variable rate (slope)
Direct labor hours	Independent variable

2. If next month's budgeted direct labor hours equal 15,000, what is the budgeted overhead cost? $

3. If next quarter's budgeted direct labor hours equal 75,000, what is the budgeted overhead cost? $

4. If next year's budgeted direct labor hours equal 300,000, what is the budgeted overhead cost? $