ETutor is an online tutoring service provider that is partic

ETutor is an online tutoring service provider that is particularly popular with college students. The company is interested in estimating the fixed and variable components of its tutoring services costs. The manager believes that these costs are driven by the number of hours of tutoring services provided. The following information was gathered for the last six months of business Month January February March April May une Number of Hours Tutoring costs 25,000 41,000 29,000 31,000 34,000 18,000 $308,00e0 420,000 352,000 373,000 378,000 252,000 Required 1) Compute the average tutoring cost per hour for the six-month period. (Round the average tutoring cost per hour to two decimal points.) 2) Use the high-low method to estimate the total fixed cost and the variable cost per hour. (Round the variable cost per hour to two decimal points.) 3) Name one advantage and one disadvantage of the high-low method 4) Describe the scattergraph method that can be used to analyze mixed costs

Solution

Answer:

1) Average Tutoring Cost per hour for the six month period = (Total Tutrig cost incurred in six months/ Total Tutoring Hours in six months) = $ 2083000 / 178000 hours = 11.7022 or $ 11.70 per hour.

So, the average tutoring cost per hour for six month period is $ 11.70 per hour.

2) High Low Method: In high low method for estimation of the total fixed cost and variable cost per hour; we divide the difference between the highest and lowest cost value by the difference between their respective number of hours as shown below;

Variable Cost per Hour = (Highest Cost Value - Lowest Cost Value) / (Number of hours for highest cost value - Number of hours for Lowest Cost Value) = (420000 - 252000) / (41000 - 18000) = (168000 / 23000) = $7.3043 or $ 7.30 per hour

And Total Fixed Cost = Total Cost - Total Variable Cost = 420000 - 41000*7.30 = $ 120700

Note: Due to impac of rounding off of Variable Cost per unit; the value for totaa fixed cost may vary.

So, the total fixed cost is $ 120,700 and Variabe Cost per hour is $ 7.30

3) Advantages and Disadvantages of High Low Method:

Advantage: It is an easy method and requires less formalities and calculations.

Disadvantage: It gives esimated values and not the exact values.

4) Scattergraph Method to Analyse Mixed Costs: Scattergraph method is a method used o analuze the fixed and variable components of mixed costs. In this method graphical technique is used to analyse / separate fixed and variable components of mixed costs. In this method the fixed and variable costs are separated by plotting the activity level (number of hours in our case) along X- Axis and plotting total cost or mixed cost (Total Tutoring OCst in our case)along the Y-Axis. A regression line is then drawn on the graph by using visual inspection to cover the maximum number of points or to minimize the total vertical distance between the line and all the points. When we extend this line to intersect Y Axis; the Y-intercept of the line gives us the Total Fixed Cost. The Slope of Regression Line gives us Variable Cost per unit.