Question

Joe, Jeff and Jerry Frank own Frank Brothers Farm, a seed company specializing in seed corn. At their weekly meeting they tried to calculate the portion of the farm's overhead expenses that is fixed and the portion that is variable. Over the past twelve months, the number of bushels of seed corn that has been sold reached its peak in May, when the total monthly overhead costs totaled $290,000 for 90,000 bushels of seed corn sold. The lowest number of bushels sold in the last twelve months occurred in December, when total overhead costs were $70,000 for 10,000 bushels sold. What is the fixed portion of the monthly overhead expenses?

Answer 1

Fixed costs= $42,500

Step-by-step explanation:

Giving the following information:

May:

Total monthly overhead costs totaled $290,000 for 90,000 bushels of seed corn sold.

December:

Total overhead costs were $70,000 for 10,000 bushels sold.

To calculate the fixed component, we need to use the high-low method.

First, the variable component:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (290,000 - 70,000) / (90,000 - 10,000)

Variable cost per unit= $2.75

Now, the fixed costs:

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 290,000 - (2.75*90,000)

Fixed costs= $42,500

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 70,000 - (2.75*10,000)

Fixed costs= $42,500