Mears Production Company makes several products and sells them for an average pr
ID: 2335724 • Letter: M
Question
Mears Production Company makes several products and sells them for an average price of $75. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, account analysis and high-low. In both cases, she used units of production as the independent variable. For the account analysis approach, she developed the cost function by analyzing each cost item in June, when production was 1,900 units. The following are the results of that analysis:
Total Cost
Variable Cost
Fixed Cost
$7,220
$7,220
$0
$9,500
$9,500
$0
$8,670
$5,510
$3,160
$6,470
$2,850
$3,620
$4,700
$0
$4,700
$36,560
$25,080
$11,480
For the high-low method, she developed the cost function using the same data from June and data from May, when production was 2,350 units and total costs were $43,350.
After developing the two cost functions, the accountant used them to make predictions for the month of October, when production was expected to be 2,250 units.
REQUIRED [ROUND UNIT COSTS TO THE NEAREST CENT AND TOTAL COSTS TO THE NEAREST DOLLAR.]
Part A
1. Using account analysis, what was the accountant's estimate of total fixed costs for October?
2. Using account analysis, what was the accountant's estimate of total variable costs for October?
Part B
1. Using the high-low method, what was the accountant's estimate of total fixed costs for October?
2. Using the high-low method, what was the accountant's estimate of variable costs per unit for October?
Total Cost
Variable Cost
Fixed Cost
Direct materials$7,220
$7,220
$0
Direct labor$9,500
$9,500
$0
Factory overhead$8,670
$5,510
$3,160
Selling expenses$6,470
$2,850
$3,620
Administrative expenses$4,700
$0
$4,700
Total expenses$36,560
$25,080
$11,480
Explanation / Answer
Part-A 1. Calculation of accountant's estimate of total fixed costs for October, Using account analysis: Cost Item Fixed Cost Factory overhead 3160 Selling expenses 3620 Administrative expenses 4700 Total Fixed Cost 11480 2. Calculation of accountant's estimate of Variable cost per unit for October, Using account analysis: Cost Item Variable Cost Direct materials 7220 Direct labor 9500 Factory overhead 5510 Selling expenses 2850 Total variable Cost (A) 25080 Number of units (B) 1900 Variable Cost per unit (A/B) 13.2 Part B units Costs Highest level of production 2350 43350 Low level of production 1900 Total cost of low level production (11480+25080) 36560 caclulation variable cost per unit (43350-36560)/(2350-1900) 15.09 1) Fixed cost (43350-(2350*15.088) 7891 2) Variable cost (2250*15.089) 33950