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The manager at Screaming Trees has been trying to calculate the portion of the​ company's overhead expenses that is fixed and the portion that is variable. Over the past twelve​ months, the number of yards of mulch processed was highest in​ July, when the total monthly overhead costs totaled $ 30 , 000 for 36 , 000 yards of mulch processed. The lowest number of yards of mulch processed in the last twelve months occurred in​ October, when total overhead costs were $ 23 , 000 for 27 , 000 yards of mulch processed. What was the variable cost per​ yard?

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User Nick Reed
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Answer:

The answer is: $0.78 per yard (rounded to 2 decimal places)

Step-by-step explanation:

In costing products, the high-low method is used to determine the costs of production when there is limited information provided. In this method, the goal is to separate the fixed costs and the variable costs of production based on the highest level of activity and the lowest level of activity together with the associated costs at both levels. The total fixed costs of production remain fixed during production whereas the total variable costs change in proportion to production levels. This calculation is done as follows:

(Highest cost - Lowest cost)/(Highest activity level - Lowest activity level)

($30,000 - $ 23,000)/(36,000 yards - 27,000 yards)

$7000/9,000 yards

Variable cost = $0.777777777/yard

At 27, 000 yards , the fixed costs are $2,000 whereas the variable costs amount to $21, 000 (0.777777777*27,000). At 36, 000 yards, the fixed costs are $2,000 whereas the variable costs amount to $28, 000 (0.777777777*36,000). The fixed cost at each level of production remains constant, regardless of production level,at $2,000. The variable costs increase from $21,000 to $28,000.

User Johnwargo
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