The manager at Copley Mulch has been trying to calculate the portion of the company's overhead expenses that is fixed and the portion that is variable. Over the past twelve months, the number of square metres of mulch processed was highest in July, when the total monthly overhead costs totaled $6,000 for 25,000 square metres of mulch processed. The lowest number of square metres of mulch processed in the last twelve months occurred in October, when total overhead costs were $4,000 for 15,000 square metres of mulch processed. Use the high-low method to answer the following questions.
-What is the estimated monthly overhead expense at Copely Mulch if volume is expected to be 21,000 square metres of mulch?
A) $5,000
B) $5,600
C) $5,200
D) $4,500

Question

Quizplus · Accepted Answer

Using the high-low method:

Variable cost per square metre = (highest total overhead cost - lowest total overhead cost) / (highest square metres processed - lowest square metres processed)

Variable cost per square metre = ($6,000 - $4,000) / (25,000 - 15,000) = $0.20

Fixed cost = highest total overhead cost - (variable cost per square metre x highest square metres processed)

Fixed cost = $6,000 - ($0.20 x 25,000) = $1,000

Therefore, the cost equation for overhead expenses is:

Overhead expense = $1,000 + ($0.20 x square metres processed)

To find the estimated monthly overhead expense for processing 21,000 square metres of mulch:

Overhead expense = $1,000 + ($0.20 x 21,000) = $5,200

So the best choice is C, $5,200.

The Manager at Copley Mulch Has Been Trying to Calculate