Question

1. High-Low Method for a Service Company

   Continental Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Continental Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.
   

   	Transportation Costs		Gross-Ton Miles
   January	$24,500,000		3,000,000
   February	22,375,000		2,500,000
   March	29,000,000		6,300,000
   April	34,800,000		9,500,000
   May	40,312,500		12,750,000
   June	35,500,000		10,000,000

   Determine the variable cost per gross-ton mile and the total fixed cost.

   Variable cost (If required, round to two decimal places.)	$ per gross-ton mile
   Total fixed cost	$

Answer 1

Variable cost per gross-ton mile = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (40,312,500 - 22,375,000)/(12,750,000 - 2,500,000)

= 17,937,500/10,250,000

= $1.75 per gross-ton mile

Total Fixed cost = Highest activity cost - (Highest activity x Variable cost per gross-ton mile)

= 40,312,500 - (12,750,000 x 1.75)

= 40,312,500 - 22,312,500

= $18,000,000