How accurate will the cost formula developed in requirement 3 be at predicting the total cost for the color copy department? 5. use the high-low method to estimate the variable and fixed costs for the color copy department. what cost formula should be used based on your analysis? 6. if 22,100 copies are made during january, what is the total cost predicted by each method?
The accuracy of the cost formula developed in requirement 3 will depend on the quality of the data used to develop the formula. If the data used is representative and covers a wide range of activity levels, the cost formula should be fairly accurate at predicting the total cost for the color copy department.
To estimate the variable and fixed costs using the high-low method, we need to first identify the highest and lowest activity levels and their corresponding costs. Let's say the highest activity level is 15,000 copies with a total cost of $10,000, and the lowest activity level is 5,000 copies with a total cost of $5,000.
Using the high-low method, we can calculate the variable cost per copy:
Variable cost per copy = (Total cost at highest activity level - Total cost at lowest activity level) / (Activity at highest level - Activity at lowest level)
Variable cost per copy = ($10,000 - $5,000) / (15,000 - 5,000)
Variable cost per copy = $5000 / 10,000 = $0.50 per copy
Now we can calculate the fixed cost using the high-low method:
Fixed cost = Total cost at highest activity level - (Variable cost per copy * Activity at highest level)
Fixed cost = $10,000 - ($0.50 * 15,000)
Fixed cost = $10,000 - $7,500 = $2,500
Therefore, the cost formula should be:
Total Cost = $2,500 + ($0.50 * Number of copies)
If 22,100 copies are made during January, we can calculate the total cost predicted by each method:
Using the cost formula from requirement 3:
Total Cost = $1,000 + ($0.80 * 22,100)
Total Cost = $1,000 + $17,680
Total Cost = $18,680
Using the cost formula from the high-low method:
Total Cost = $2,500 + ($0.50 * 22,100)
Total Cost = $2,500 + $11,050
Total Cost = $13,550
Therefore, the total cost predicted by the high-low method is $13,550, which may be more accurate than the cost formula developed in requirement 3, depending on the quality of the data and assumptions made.