EX 21-8 High-low method for service company

Patriot Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The  activity base used by Patriot Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.



Transportation Costs Gross-Ton Miles
January $1,666,000 539,000
February 1,460,200 607,600
March 1,255,000 475,000
April 1,421,000 588,000
May 1,288,000 504,000
June 1,750,000 750,000






Determine the variable cost per gross-ton mile and the total fixed cost.


Answer:

Variable Cost per = Difference in Total Costs
Gross-Ton Mile Difference in Gross-Ton Miles
Variable Cost per
Gross-Ton Mile = $1,750,000 – $1,255,000
750,000 gross-ton miles – 475,000 gross-ton miles
Variable Cost per
Gross-Ton Mile = $495,000
275,000 gross-ton miles
= $1.80 per gross-ton mile
The fixed costs can be determined by subtracting the estimated total variable
cost from the total cost at either the highest or lowest level of gross-ton mile,
as follows:
Total Cost = (Variable Cost per Gross-Ton Mile × Gross-Ton Miles) + Fixed Costs
Highest level:
$1,750,000 = ($1.80 × 750,000 gross-ton miles) + Fixed Costs
$1,750,000 = $1,350,000 + Fixed Costs
$400,000 = Fixed Costs
Lowest level:
$1,255,000 = ($1.80 × 475,000 gross-ton miles) + Fixed Costs
$1,255,000 = $855,000 + Fixed Costs
$400,000 = Fixed Costs