Question

The manager of the main laboratory facility at Center is interested in being able to predict the overhead costs each month for the lab. The manager believes that total overhead varies with the number of lab tests performed but that some costs remain the same each month regardless of the number of lab tests performed. The lab manager collected the following data for the first seven months of the year. Number of Lab Total Laboratory Tests Performed Overhead CostsMonth January 2,700 $22,900February 2,500 $23,500March 3,500 $29,800 April 4,000 $32,500May 4,600 $31,100 June 2,250 $22,000 July 2,000 $19,100 1. Use the high-low method to determine the laboratory's cost equation for total laboratory overhead. Use your results to predict total laboratory overhead if 3,200 lab tests are performed next month.2. Use the high-low method to determine UrbanFit's operating cost equation.

Answer 1

Answer:

Total cost= 9,871 + 4.615*x

x=number of lab tests

Explanation:

To calculate the variable and fixed costs using the high-low method, we need to use the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (31,100 - 19,100) / (4,600 - 2,000)

Variable cost per unit= $4.615

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 31,100 - (4.62*4,600)

Fixed costs= $9,871

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 19,100 - (4.615*2,000)

Fixed costs= $9,870

Total cost= 9,871 + 4.615*x

x=number of lab tests