Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 25

Methods of Estimating Costs: High-Low, Ethical Issues

Oak Island Amusements Center provides the following data on the costs of maintenance and the number of visitors for the last three years:

Number of Visitors per Year: (thousands)	Maintenance Costs ($000)
1,825	$2,925
2,007	3,225
2,375	3,750

Required

a. Use the high-low method to estimate the fixed cost of maintenance annually and the variable cost of maintenance per visitor.

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b. The company expects a record 2,600,000 visitors next year. What would be the estimated maintenance costs?

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c. Company management is considering eliminating the maintenance department and contracting with an outside firm. Management is especially concerned with the fixed costs of maintenance. The maintenance manager tells you, the cost analyst, that 2,375 visitors is an outlier and should not be used in the analysis. Assume that this will lower estimated fixed costs. Is it ethical to treat this observation as an outlier?

Step 1 of 5

Variable cost:

Variable costs tend to vary in direct proportion to the volume of production. In other words, if volume of production increases, total variable cost also increases and vice versa, example- direct material, direct wages, power, royalties, small tools etc.