Question

The Bradshaw Law Office has the following monthly telephone records and costs: Calls Costs 2,000 $2,400 1,500 2,000 2,200 2,600 2,500 2,800 2,300 2,700 1,700 2,200 Identify the fixed and variable cost elements using the high-low method.

Answer 1

Using the high-low method, we can determine that the fixed cost element is $1,170 and the variable cost per call is $0.615.

Step-by-step explanation:

The high-low method is used to separate the fixed and variable cost elements in a set of data. To use this method, we need to identify the highest and lowest levels of activity and their corresponding costs. Let's calculate the variable cost per unit first.

Highest level: 2,800 calls, $2,800
Lowest level: 1,500 calls, $2,000

Variable cost per unit = (Highest cost - Lowest cost)/(Highest level - Lowest level) = ($2,800 - $2,000)/(2,800 - 1,500) = $800/1,300 = $0.615 per call

The fixed cost element can be calculated by substituting the variable cost per unit into the equation: Fixed cost = Total cost - (Variable cost per unit x Total activity)
Fixed cost = $2,400 - ($0.615 x 2,000) = $2,400 - $1,230 = $1,170

Therefore, the fixed cost element is $1,170 and the variable cost per call is $0.615.

Answer 2

a. Variable cost element is $0.80 per call.

b. Fixed cost element is $800.

Step-by-step explanation:

Note: The data in the question question are merged together. They are therefore sorted before answering the question as follows:

Calls Costs

2,000 $2,400

1,500 2,000

2,200 2,600

2,500 2,800

2,300 2,700

1,700 2,200

The explanation of the answers is now given as follows:

a. Calculation of variable cost elements

Variable cost per call = (Highest Costs - Lowest Costs) / (Highest Calls - Lowest Calls) = ($2,800 - $2,000) / (2,500 - 1,500) = $800 / 1,000 = $0.80

Therefore, variable cost element is $0.80 per call.

b. Calculation of fixed cost elements

Total cost = Total Fixed Cost + Total Variable Cost ................. (1)

Where;

Total Variable Cost = Variable cost call * Calls at a particular Total Cost

Using highest calls and substitute into equation (1), we have:

$2,800 = Total Fixed Cost + ($0.80 * 2,500)

$2,800 = Total Fixed Cost + $2,000

Total Fixed Cost = $2,800 - $2,000

Total Fixed Cost = $800

Therefore, fixed cost element is $800.