Question

Continental Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Continental Railroad is a measure of railroad operating activity, termed "gross-ton miles," which is the total number of tons multiplied by the miles moved.

Transportation Costs Gross-Ton Miles

January $24,500,000 3,000,000

February 22,375,000 2,500,000

March 29,000,000 6,300,000

April 34,800,000 9,500,000

May 40,312,500 12,750,000

June 35,500,000 10,000,000


Determine the variable cost per gross-ton mile and the total fixed cost.

Answer 1

Using the high-low method, the variable cost per gross-ton mile for Continental Railroad is $1.775, and the total fixed cost is $17,937,500. This was calculated by identifying the highest and lowest activity levels and their associated costs.

Step-by-step explanation:

To determine the variable cost per gross-ton mile and the total fixed cost using the high-low method from the operating data provided by Continental Railroad, we identify the months with the highest and lowest activity levels, which are April (highest) and February (lowest). The difference in gross-ton miles between these months is 9,500,000 - 2,500,000 = 7,000,000 gross-ton miles. Similarly, the difference in transportation costs is $34,800,000 - $22,375,000 = $12,425,000.

To calculate variable cost per gross-ton mile, divide the difference in costs by the difference in gross-ton miles: $12,425,000 ÷ 7,000,000 = $1.775. Hence, the variable cost is $1.775 per gross-ton mile. Next, to find the fixed costs, we calculate the total variable cost at the low activity level (February) by multiplying the variable cost per gross-ton mile by February's gross-ton miles: $1.775 * 2,500,000 = $4,437,500. Subtract this amount from the total cost of February to get the total fixed cost: $22,375,000 - $4,437,500 = $17,937,500. Therefore, the total fixed cost is $17,937,500.