Exercise 216A Estimating fixed and variable costs using the

Exercise 2-16A Estimating fixed and variable costs using the high-low method LO 2-6 Benson Boat Company makes inexpensive aluminum fishing boats. Production is seasonal, with considerable activity occurring in the spring and summer. Sales and production tend to decline in the fall and winter months. During 2019, the high point in activity occurred in June when it produced 200 boats at a total cost of $158,880. The low point in production occurred in January when it produced 33 boats at a total cost of $52,000. Required a. Use the high-low method to estimate the amount of fixed cost incurred each month by Benson Boat Company. b. Determine the total estimated cost if 120 boats are made a. Fixed cost b. Total estimated cost

Solution

1.

First let’s calculate variable cost per unit using the identified high and low activity levels:

Variable cost =

(Total cost of high activity – Total cost of low activity)/(Highest activity unit- Lowest activity unit)

                     = ($ 158,880 - $ 52,000)/(200 – 33)

                     = $ 106,880/ 167 = $ 640 per unit

We can input the value of variable cost in high or low cost to find out total fixed cost as:

Total cost = (Variable cost per unit x Units produced) + Total fixed cost

$ 158,880 = ($ 640 x 200) + Total fixed cost

Total fixed cost = $ 158,880 - ($ 640 x 200)

Total fixed cost = $ 158,880 - $ 128,000 = $ 30,880

2.

Total cost = Fixed cost + (Variable cost per unit x Units produced)

                   = $ 30,880 + ($ 640 x 120)

                  = $ 30,880 + $ 76,800 = $ 107,680