Bethany Link delivers parts for several local auto parts stores. She charges clients $0.75 per mile driven. She has determined that if she drives 2,100 miles in a month, her average operating cost is $0.55 per mile. If Bethany drives 4,200 miles in a month, her average operating cost is $0.40 per mile.
Required:
a. Using the high-low method, determine Bethany’s variable and fixed operating cost components. (Round your cost per unit answer to 2 decimal place.)
1. variable cost per unit= ?
2. fixed cost= ?
To determine Bethany's variable and fixed operating cost components using the high-low method, we need to find the difference in total operating costs between the two levels of activity (mileage).
Let's start by calculating the variable cost per unit:
Variable cost per unit = Change in total operating cost / Change in mileage
First, we calculate the change in total operating cost:
Change in total operating cost = Average operating cost at the higher level - Average operating cost at the lower level
Change in total operating cost = $0.40 - $0.55 = -$0.15
Next, we calculate the change in mileage:
Change in mileage = Higher level of mileage - Lower level of mileage
Change in mileage = 4,200 miles - 2,100 miles = 2,100 miles
Now we can calculate the variable cost per unit:
Variable cost per unit = -$0.15 / 2,100 miles
Variable cost per unit ≈ -$0.00007 per mile
Next, to find the fixed cost, we use one of the data points and the variable cost per unit:
Total operating cost = Fixed cost + (Variable cost per unit * Mileage)
Using one of the data points (2,100 miles, average operating cost of $0.55 per mile), we can substitute the values to find the fixed cost:
$0.55 per mile = Fixed cost + (-$0.00007 per mile * 2,100 miles)
$0.55 per mile = Fixed cost - $0.15
Fixed cost = $0.55 per mile + $0.15
Fixed cost = $0.70 per mile
Therefore, using the high-low method:
1. Variable cost per unit = -$0.00007 per mile (rounded to 2 decimal places)
2. Fixed cost = $0.70 per mile