Solutions to Chapter 3 - Cost Behavior - Quantitative Methods of Separating Variable & Fixed Costs

High-Low Method
Y = F + VX

F= Fixed Costs
V= Variable cost per unit
X= level of activity

High Low Method:

1) Solve for V (Choose high & low level of activity (X) as primary criteria)
Y X
High 7500 500
Low 2000 100
5500 400

V = 5,500 / 400 = 13.75

2) Solve for F, by using one pair (of activity & cost) of either the low or high level of activity and
substituting the values of X, Y & V in the equation Y = F + VX
Using Low level:
2,000 = F + 13.75(100)
2,000 = F + 1,375
F = 2,000-1,375 = 625

3) Predictive Formula: Y = 625 + 13.75X

4) Cost estimation / Cost perdiction

If number of moves is 600

Y = 625 + 13.75(600)
Y = 625 + 8,250
Y = 8,875
F = 800

Y = F + VX

Use data for March (3): Y = 2,780

X = 175
Find V:

Y = F + VX
2,780 = 800 + V(175)
-175 V = 800-2,780
V = 1,980 / 175 = 11.31
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.928949
R Square 0.862946
Adjusted R 0.845815
Standard E 770.4987
Observatio 10

ANOVA
df SS MS F Significance F
Regression 1 29903854 29903854 50.37132 0.000102
Residual 8 4749346 593668.3
Total 9 34653200

Coefficients
Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%
Upper 95.0%
Intercept 854.4994 569.781 1.499698 0.17208 -459.418 2168.417 -459.418 2168.417
X Variable 12.39153 1.745956 7.097276 0.000102 8.365347 16.41771 8.365347 16.41771
Y X
2000 100
3090 125
2780 175
1990 200
7500 500
5300 300
4300 250
6300 400
5600 475
6240 425