Question

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function
Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:
Month Labor Cost Employee Hours
January $7,000 360
February 8,140 550
March 9,899 630
April 9,787 610
May 8,490 480
June 7,450 350
July 9,490 570
August 7,531 310
Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant.
In your calculations, round the variable rate per employee hour to the nearest cent.
Required:
1. Using the high-low method, calculate the fixed cost of labor.$
2. Using the high-low method, calculate the variable rate.
$ per employee hour
3. Using the high-low method, construct the cost formula for total labor cost.
Total labor cost = $ + [$ × Employee hours]

Answer 1

Answer and Explanation:

1. The computation of fixed cost of labor is shown below:-

Fixed cost = High cost - (High labor hours × Variable cost per hour)

= $9,899 - (630 hours × $7.40)

= $9,899 - $4,622

= $5,237

2. The computation of variable rate is shown below:-

Variable cost = (High value - Low value) ÷ (High labor hours - Low labor hours)

= ($9,899 - $7,531) ÷ (630 - 310)

= $2,368 ÷ 320

= $7.40 per unit

3. The construction of formula for total labor cost is shown below:-

Total labor cost = $5,237.00 + $7.40 × Employee hours