Electric Dreams Corporation is a wholesaler of a large variety of light fittings and other lighting
needs. The company's accountant, Henry Benry, has recently completed a cost study of the
firm's shipping department in which he used the weight of supplies loaded or unloaded at the
company's loading dock to quantify the department’s activity. Henry compiled the following
data.
Month
Supplies loaded
or unloaded (kg)
Shipping
department costs
January 5,400 $70,200
February 4,800 67,800
March 3,900 67,500
April 3,000 61,200
May 6,600 66,600
June 7,200 75,300
July 6,000 72,000
August 5,400 68,400
September 7,800 72,720
October 3,300 66,300
November 3,600 68,100
December 4,200 68,100
Required:
a. Estimate the shipping department's cost behaviour using the high low method. Use an
equation to express the results of this estimation method.
b. Predict the shipping department’s cost for a month when loads totalling 4,500 kilograms
are moved

Let's solve the problem step by step:

### **Part a: Estimating Cost Behavior Using the High-Low Method**

The **high-low method** is a way to estimate the fixed and variable costs of a department. The method uses the highest and lowest activity levels and their corresponding costs to estimate the variable cost per unit and the total fixed cost.

The formula to estimate cost behavior is:

\[
\text{Total cost} = (\text{Variable cost per unit} \times \text{Activity level}) + \text{Fixed cost}
\]

The **high-low method** involves the following steps:
1. Identify the highest and lowest activity levels (supplies loaded/unloaded in kg).
2. Calculate the variable cost per unit (cost per kilogram).
3. Calculate the fixed cost.

---

#### **Step 1: Identify High and Low Activity Levels**

- **Highest activity level:** 7,800 kg in September, with a cost of $72,720.
- **Lowest activity level:** 3,000 kg in April, with a cost of $61,200.

---

#### **Step 2: Calculate the Variable Cost per Unit**

The variable cost per unit is the change in cost divided by the change in activity:

\[
\text{Variable cost per kg} = \frac{\text{Cost at highest activity} - \text{Cost at lowest activity}}{\text{Highest activity} - \text{Lowest activity}}
\]

Substitute the values:

\[
\text{Variable cost per kg} = \frac{72,720 - 61,200}{7,800 - 3,000} = \frac{11,520}{4,800} = 2.4 \, \text{per kg}
\]

So, the variable cost is $2.40 per kilogram.

---

#### **Step 3: Calculate the Fixed Cost**

We can use the total cost equation to calculate the fixed cost. We'll use the data from the highest activity level (September):

\[
\text{Total cost} = (\text{Variable cost per unit} \times \text{Activity level}) + \text{Fixed cost}
\]

Substitute the values:

\[
72,720 = (2.4 \times 7,800) + \text{Fixed cost}
\]

\[
72,720 = 18,720 + \text{Fixed cost}
\]

\[
\text{Fixed cost} = 72,720 - 18,720 = 54,000
\]

So, the fixed cost is $54,000.

---

#### **Equation for Cost Behavior**

Now that we know the variable cost per unit and the fixed cost, we can express the cost behavior equation:

\[
\text{Total cost} = 2.4 \times (\text{kg of supplies}) + 54,000
\]

This is the equation that describes the shipping department's cost behavior using the high-low method.

---

### **Part b: Predicting the Shipping Department's Cost for 4,500 kg**

We will now use the cost behavior equation from part (a) to predict the cost for 4,500 kg of supplies:

\[
\text{Total cost} = 2.4 \times 4,500 + 54,000
\]

\[
\text{Total cost} = 10,800 + 54,000 = 64,800
\]

Therefore, the predicted cost for moving 4,500 kilograms of supplies is **$64,800**.

---

### Summary:
- The estimated cost behavior equation is:  
  \[
  \text{Total cost} = 2.4 \times (\text{kg of supplies}) + 54,000
  \]
- The predicted shipping department cost for 4,500 kg of supplies is **$64,800**.

---

Would you like further details or have any questions?

Here are 5 related questions to expand on:
1. How would the result change if the high-low method used different months?
2. What are the limitations of the high-low method?
3. How would you calculate costs if the company operated in different locations with varying fixed costs?
4. Can you identify outliers in the data? How might this affect the results?
5. How would you use regression analysis to get a more accurate cost behavior estimate?

**Tip:** The high-low method is simple but sensitive to extreme values. Consider checking for outliers before using it!

Electric Dreams Corporation is a wholesaler of a large variety of light fittings and other lighting needs. The company's accountant, Henry Benry, has recently completed a cost study of the firm's shipping department in which he used the weight of supplies loaded or unloaded at the company's loading dock to quantify the department’s activity. Henry compiled the following data. Required: a. Estimate the shipping department's cost behaviour using the high low method. Use an equation to express the results of this estimation method. b. Predict the shipping department’s cost for a month when loads totalling 4,500 kilograms are moved.

Learn how to estimate the shipping department's cost behavior at Electric Dreams Corporation using the high-low method. This solution provides step-by-step calculations for variable costs, fixed costs, and predicts shipping costs for 4,500 kilograms of supplies. Ideal for finance students and professionals.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation