B. The cost is shown on the vertical axis on the left.

B. The total fixed cost is the point on the vertical line of costs where the line crosses. Total variable costs and variable costs per unit are calculated once the fixed cost is determined by looking at the scatterplot.

C. The scatter graph method is used to determine the fixed and variable portions of a mixed cost.

B. The independent variable is the activity that is changing that is also changing total cost

C. The variable cost per unit is referred to as the slope parameter since it determines the slope of the line.

C. A positive coefficient means that as activity increases, total cost also increases.

D. Only the high activity and the low activity will give the same cost behavior. It is very easy to apply and using the formula will give the same answer to all who apply the method.

C. The high low formula directly calculates the variable cost per activity. This variable cost per activity is then used to compute the total fixed costs. The fixed cost per unit and total variable costs is different for different levels of activity.

A. The high low method separates the fixed part and variable part of a particular costs. As volume changes the fixed cost will remain the same and the total variable cost will change proportionately with the change in activity. The high low method tells you how much the variable portion will change for each change in activity which will allow you to estimate total costs for different levels of activity. The other answers do not make any sense due to the way fixed, mixed and variable costs react to changes in activity.

C. Use the formula Total cost = Total fixed cost + (VC$ per unit x activity). When the activity is 0, then the total variable cost portion will be 0 also and fixed costs will equal total costs. The amount of fixed costs is not relevant to answering this question. (a. & d.) A higher level of activity will make total costs = to total fixed costs unless the variable cost is 0.

B. Total costs = total fixed costs + (variable cost per activity x activity). The “a” is in the total fixed cost position

B. The salary is a fixed cost and the commission is a variable cost, together they are a mixed cost. Depreciation and salary are fixed costs, and anything at a rate per will be a variable cost.

1st Identify the fixed cost portion as $40,000 + $15,000 = $55,000

2nd Take the cost per activity x the activity to get total variable cost:

$1.55 per labor hour x 22,000 labor hours =                   $34,100
$4.75 per machine hour x 12,000 machine hours =       $57,000
Total Variable Costs                                                             $91,100

Total expected costs = $55,000 + $91,100 = $146,100

The cost formula for the company is:

         $55,000 + ($1.55 x labor hours) + ($4.75 x machine hours)

1st – Put the highest and the lowest activity amount on the bottom.

2nd – Put the dollar amount from the same period as the high and low activity on the top as the high and low dollar. Do not just take the highest and lowest
dollar amount.

$36,065 – $28,674 = $7,391 = $20.47 per customer
        1,467 – 1,106      361

Per customer is the variable cost

Total cost = Fixed cost + ($20.47 x # customers served)

Pick the high or low dollar and activity, do not mix a high and a low.

     $36,065 =    ?    + $20.47 x 1,467= $30,029

           Fixed cost = $6,036 per month

Cost Formula is $6,036 + ($20.47 x number of customers)

Using the cost formula, 1,500 customers should cost:

               $6,036 + ($20.47 x 1,500 = $30,705) = $36,741
 

Notice that this is less than what it actually cost to serve 1,422 customers in May. The high low formula is just an estimate and the cost formula will not give the exact outcome due to various factors such as what the customer orders. 

If you are learning how to use a scatter graph, plot the months on a scatter graph use the formulas and see if you come close to the above fixed cost and variable cost per customer.  You should be close but not exactly the same.

1st – Compute the total cost for each volume level by multiplying the cost per unit times the number of units during that period.

                      Units              Total Cost
                      15,000           $225,000
                      14,000           $220,500

2nd – You only have two points of reference so take the high less the low and work the high low formula

                     $225,000 – $220,500 = $4,500   =   $4.50 per unit
                          15,000 – 14,000          1,000

3rd – Use the formula to determine total fixed costs

                    $225,000 = $ ? + ($4.50 x 15,000 = $67,500)
                            Total Fixed Costs = $157,500

Company’s cost formula is: $157,500 + ($4.50 x # units produced)

For 18,000 units: $157,500 + ($4.50 x 18,000 = 81,000) = 238,500

$920 – $695 = $225 = $0.75 per hour of operation
  600 – 300        300

Total costs = Fixed costs + (cost per x activity)
                      $920 = ?      +       ($0.75 x 600 = $450)
                            Fixed Costs = $470

Cost formula = $470 + ($0.75 x hours of operation)

Remember to do the activity first and then match the high and low dollars for the same periods. Do not just take the highest and lowest dollars and put them on top.