Arlo's T-shirt Shop only has four costs: T-shirt cost, rent cost on the shop, shipping cost, and...
Question:
Arlo's T-shirt Shop only has four costs: T-shirt cost, rent cost on the shop, shipping cost, and utilities cost. Arlo's sells the T-shirt for $25 each. Management has prepared the following estimated cost information for next month:
| At 10,000 | At 20,000 | |
| T-shirts | T-shirts | |
| T-shirt cost | $75,000 | $150,000 |
| Rent cost | $33,000 | $33,000 |
| Shipping cost | $30,000 | $42,000 |
| Utilities cost | $23,000 | $36,000 |
Assume that all of the activity levels mentioned in this problem are within the relevant range. Use the high-low method to determine the cost formulas for each cost.
Required:
a) Calculate what Arlo's should expect for total variable cost if 5,500 T-shirts are sold next month.
b) Prepare Arlo's contribution approach income statement for a monthly sales volume level of 17,000 T-shirts.
Cost Behaviors:
There are three types of cost behaviors, variable, fixed, and mixed. Variable costs will change in total with changes in activity levels but remain the same per unit. Fixed costs will change per unit with changes in activity levels but remain the same in total. Mixed costs will change both in total and per unit, because they have a variable component and a fixed component.
Answer and Explanation: 1
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Under the high-low method, the variable cost per unit is calculated first and is then used to calculate the total fixed cost.
Cost Formulas
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High-Low Method Accounting: Formula & Examples
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Chapter 22 / Lesson 29
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Understand the high-low method in accounting. Learn the formulas for the high-low method. Learn how to compute variable cost per unit, fixed cost, and cost model.
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