Question

For the initial answers to the questions, 200 words (total) are a good guideline. For full credit you must comment on at least two of your peer's posts. Make sure that your replies are substantive and add to the conversation. 1. In applying the high-low method of cost estimation to mixed costs, how is the total fixed cost estimated? 2. If fixed costs increase, what would be the impact on the (a) contribution margin? (b) income from operations? 3. An examination of the accounting records of Clowney Company disclosed a high contribution margin ratio and production at a level below maximum capacity. Based on this information, suggest a likely means of improving income from operations. Explain. The answer to the discussion questions are due by Thursday and your replies are due by Sunday

Answer 1

1. To use High Low method we compare the  highest level of activity and the lowest level of activity and comparing the total unit costs at each level.

   The Formulas for the High-Low Method has two steps

   There two steps in calculating the fixed cost First, calculate the variable cost component and then the fixed cost component.

To calculate the Variable cost component -

(Highest activity Cost - Lowest activity cost Divided by (Highest activity unit - Lowest activity unit)

Next, use the following formula to determine the fixed cost component:

Fixed Cost =Highest activity cost −(Variable Cost × Highest Activity Units)​

2. Increase in fixed cost will not impact contribution margin because Contribution margin is a product's selling price minus all associated variable costs, resulting in the incremental profit earned for each unit sold.

Increase in fixed cost will impact income form operations adversely, as the profit will decrease with increase in fixed cost.

3. High contribution margin  represents the portion sales revenue that can be used to cover the company's fixed costs. The contribution margin remains the same, even when the number of units produced and sold has changed as the variable cost per unit remains the same. Increasing the production to match the maximum production capacity will enable us to increase the contribution margin to cover the fixed cost and increase operation income. High contribution margin suggests that the product has good price in the market, if the business is able to control the fixed costs then it will help in improving the operation income.