Managerial Accounting Question: Help, I'm stuck again! :S?

Question

Question:
Using the high-low method, seperate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.

July August September
Sales in units 4,000 4,500 5,000
Sales revenue A$400,000 A$450,000 A$500,000
Less cost of goods sold 240,000 270,000 300,000
Gross Margin: 160,000 180,000 200,000

Less operating expenses:
Advertising expense 21,000 21,000 21,000
Shipping expense 34,000 36,000 38,000
Salary and commisions 78,000 84,000 90,000
Insurance expense 6,000 6,000 6,000
Depreciation expense 15,000 15,000 15,000

Total operating expense 154,000 162,000 170,000
Operating income A$6,000 A$18,000 A$30,000

Help would be appreciated. Points would be awarded for the best ans

Answer 1

You called?

First, identify the types of costs.
COGS at $60 per unit sold is a pure variable cost.
Advertising, Insurance and Depreciation are pure fixed costs.
That leaves us with just 2 mixed expenses - Shipping expense; and Salary and commissions.
Let's take shipping first. The lowest and highest expenses ($34k and $38k respectively) are for 4000 and 5000 units. The spread is therefore $4,000 over 1,000 units, i.e. $4 per unit. So the cost formula for shipping is
$34,000 + $4x, where x = every unit sold beyond 4,000 units.
$34k is the fixed portion and the rest is variable.

Next comes Salary and commissions. The lowest and highest expenses ($78k and $90k respectively) are for 4000 and 5000 units. The spread is therefore $12,000 over 1,000 units, i.e. $12 per unit. So the cost formula for Salary and commissions is
$78,000 + $12x, where x = every unit sold beyond 4,000 units.
$78k is the fixed portion and the rest is variable.

Answer 2

Typical textbook question, what is the high-low method? Wow, i hated cost accounting and still do.