Question

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 eight months are as follows:

Tanning
Month Appointments Total Cost
January 700 $1,744
February 2,000 $2,120
March 3,300 $2,810
April 2,500 $2,500
May 1,600 $1,700
June 2,400 $2,295
July 2,170 $2,100
August 2,900 $2,670
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 cost 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

Answer 1

Requirement 1

High Point = March

Low Point = January

Requirement 2

Variable rate for tanning $0.41 per tanning appointment

Fixed cost per month $1,457

Requirement 3

Total Cost = $1,457 + $0.41 × Activity Level

Requirement 4

Total predicted cost for September $ 2,482

Total fixed cost for September $1,457

Total predicted variable cost for September $1,025

Step-by-step explanation:

Requirement 1

High Point = March

Low Point = January

Requirement 2

Variable Cost = Difference in Overhead Cost (High - Low)/ Difference in Activity (High - Low)

= $2,810 - $1,744 / 3,300 - 700

= $1,066/ 2,600

= $0.41

Fixed Cost Component = Total Overhead Cost - Variable Cost × Selected Activity.

Lets Select, January 700 $1,744

Fixed Cost Component = Total Overhead Cost - Variable Cost × Selected Activity.

= $1,744 - $0.41 × 700

= $1,457

Requirement 3

Cost formula for tanning services

Total Cost = Fixed Cost + Variable Cost

thus,

Total Cost = $1,457 + $0.41 × Activity Level

Requirement 4

Total Cost = $1,457 + $0.41 × Activity Level

= $1,457 + $0.41 × 2,500

= $ 2,482