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Suppose the following observations are made by Flag-it; a merchandising firm.
| Month |
Units Shipped |
Shipping Expense |
|
| June |
25 |
$55 |
High Activity |
| July |
17 |
$40 |
|
| August |
22 |
$50 |
|
| September |
20 |
$45 |
|
| October |
15 |
$35 |
Low Activity |
| November |
18 |
$40 |
|
| December |
23 |
$50 |
1. Using the high-low method, determine the cost formula for the shipping expense.
Solution:
|
Variable cost per unit = |
change in cost |
| change in activity |
| $55 - $35 |
= |
$20 |
= |
$2/unit |
| 25 units – 15 units |
10 units |
Let F = fixed costs per month
Total shipping costs = fixed shipping cost + variable shipping costs
In June 25 units are shipped at a total cost of $55
|
$55 |
= |
F + (25 x $2) |
|
$55 |
= |
F + $50 |
|
$5/month |
= |
F |
Cost formula for shipping cost = $5 fixed costs + $2 per unit shipped per
month.
2. Prepare a scattergraph of the data given. Plot units shipped on the horizontal axis and total shipping cost on the vertical axis. Fit the best line to the data by visual inspection. Use your scattergraph to produce a cost formula to determine shipping costs.
Solution:
|
Variable costs |
= |
$55 - $35 |
= |
$20 |
= |
$2/unit |
|
per unit |
25 units – 15 units |
10 units |
Fixed shipping cost per month = $5/month
Cost formula: shipping costs = $5 + $2 per unit shipped per month.
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