Question 3-38, Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit Methods, on p. 121-122

1. Based on the visual-fit method, the Fixed Maintenance Cost based on Units Produced is approximately $13,000 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $2.25 Per Unit computed as ($17,500 - $13,000) / 2,000 units.

This can be express by the cost function: Y = $13,000 + $2.25 x No. of Units Produced

On the other hand, the Fixed Maintenance Cost based on number of Setups is approximately $5,100 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $760 Per Setup computed as ($26,000 - $5,100) / 27.5 Setups.

This can be express by the cost function: Y = $5,100 + $760 x No. of Setups

The April data is an outlier. Outlier is a nonrepresentative or abnormal observation and thus, should be ignored when analyzing fixed costs.

2. In using high-low method, we should know the exact figures; however, since we are relying on graph, the following answers will be just approximations.

Based on the high-low method, the Fixed Maintenance Cost based on Units Produced is approximately $11,500 and the Variable Cost per Unit is approximately $2.50 Per Unit. Please refer to the computation below:

Maintenance Cost Units Produced

High Level Activity 21,000 3,800

Low Level Activity 14,500 1,200

Difference 6,500 2,600

Variable Cost per Unit = $6,500 / 2,600 units = $2.50 per unit

Fixed Maintenance Cost = $21,000 � (3,800 x $2.50) = $11,500

This can be express by the cost function: Y = $11,500 + $2.50 x No. of Units Produced

On the other hand, based on the high-low method, the Fixed Maintenance Cost based on Number of Setups is approximately $7,093.75 and...

1. Based on the visual-fit method, the Fixed Maintenance Cost based on Units Produced is approximately $13,000 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $2.25 Per Unit computed as ($17,500 - $13,000) / 2,000 units.

This can be express by the cost function: Y = $13,000 + $2.25 x No. of Units Produced

On the other hand, the Fixed Maintenance Cost based on number of Setups is approximately $5,100 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $760 Per Setup computed as ($26,000 - $5,100) / 27.5 Setups.

This can be express by the cost function: Y = $5,100 + $760 x No. of Setups

The April data is an outlier. Outlier is a nonrepresentative or abnormal observation and thus, should be ignored when analyzing fixed costs.

2. In using high-low method, we should know the exact figures; however, since we are relying on graph, the following answers will be just approximations.

Based on the high-low method, the Fixed Maintenance Cost based on Units Produced is approximately $11,500 and the Variable Cost per Unit is approximately $2.50 Per Unit. Please refer to the computation below:

Maintenance Cost Units Produced

High Level Activity 21,000 3,800

Low Level Activity 14,500 1,200

Difference 6,500 2,600

Variable Cost per Unit = $6,500 / 2,600 units = $2.50 per unit

Fixed Maintenance Cost = $21,000 � (3,800 x $2.50) = $11,500

This can be express by the cost function: Y = $11,500 + $2.50 x No. of Units Produced

On the other hand, based on the high-low method, the Fixed Maintenance Cost based on Number of Setups is approximately $7,093.75 and...