Accounting Homework

The following data relating to units shipped and total shipping expense have been assembled by Archer

Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings;

[pic]

Required:

1. Using the high-low method, estimate a cost formula for shipping expense.

2. The president of the company has no confidence in the high-low method and would like you to check your results using a scattergraph.

a. Prepare a scattergraph, using the data given above. Plot cost on the vertical axis and activity on the horizontal axis. Use a ruler to fit a straight line to your plotted points.

b. Using your scattergraph, estimate the approximate variable cost per unit shipped and the approximate fixed cost per month with the quick-and-dirty method.

3. What factors, other than the number of units shipped, are likely to affect the company’s total shipping expense? Explain.

SOLUTION:

1.

| |Units Shipped |Shipping Expense |

|High activity level (June) |8 |$2,700 |

|Low activity level (July) |2 | 1,200 |

|Change |6 |$1,500 |

Variable cost element:

[pic]

Fixed cost element:

|Shipping expense at high activity level |$2,700 |

|Less variable cost element ($250 per unit × 8 units) | 2,000 |

|Total fixed cost |$ 700 |

The cost formula is $700 per month plus $250 per unit shipped or

Y = $700 + $250X,

where X is the number of...