Question

The Outback Steakhouse Restaurants offer steak, chicken, and seafood served in an Australian-themed atmosphere. Maintaining a clean environment for customers is a key success factor. Each restaurant is cleaned regularly after closing. In addition, the restaurant is deep cleaned 4 to 10 times per month, depending on various factors including the amount of business. During the deep cleaning a special treatment is given to the floors consisting of breaking down the wax and rewaxing. The two most costly resources needed to clean the floor are labor and supplies. The cost driver for both labor and supplies is square feet cleaned. Cleaning laborers are paid the same salary regardless of the number of times a restaurant is cleaned. Cleaning supplies used per square foot for closing and deep cleaning are about the same. Suppose one of the local Outback Restaurants has 4,000 square feet. In October, the restaurant was cleaned 35 times, at a total cost of $26,400. In November, the restaurant was cleaned 38 times for a total cost of $27,129. The month of December is typically much busier than October and November, so the restaurant manager expects to clean 45 times in December. Required: Use the high low method to answer the following questions Show your calculations for each questions. 1. What is the total amount of fixed costs? 2. What is the variable cost per unit? 3. What would be the total costs if the restaurant was cleaned 50 times in December? 4. Suppose Outback can hire an outside cleaning company to clean the restaurant as needed. The charge rate for cleaning is S.17 per square foot. If the outside cleaning company is hired, Outback can lay off the workers who are now cleaning and spend nothing on cleaning supplies. Will Outback save money with the outside cleaning company during December? 5. How many times would the Tacoma restaurant be cleaned for the manager to be indifferent as to using its own in-house cleaner's verses an outside cleaning company? (rounded to the next highest number) Hint: Set the in-house cost of cleaning equal to the outside cleaning cost at "x" times of cleaning,

Answer 1

High Low Method

Under High-low method, the variable cost per unit is estimated by dividing the difference of cost at highest and lowest level of activity by the difference in highest and lowest level of activity.

In other words, we are required to find out the followings:

1) The highest level of activity = 38 times

2) The lowest level of activity = 35 times

3) Difference in Highest and lowest level of activity = 38 – 35 = 3

4) Total cost at highest level of activity = $27,129 in November

5) Total cost at lowest level of activity = $26,400 in October

6) Different in total cost at highest and lowest level of activity = $27,129 – 26,400 = $729

Then, we need to find out the difference between highest and lowest level of activity as well as different in total cost at highest and lowest level of activity.

Now, we can calculate the variable cost per unit by using following formula:

Variable Cost per Unit = Difference in Cost at Highest and Lowest Activity Level / Difference of highest and lowest activity level

= $729 / 3

= $243 per cleaning

Fixed Cost can be calculated by putting variable cost per unit at highest or lowest activity.

Total Cost at highest level of activity = Total variable cost + total fixed cost = $27,129

Total Variable Cost ($243*38 times) + Fixed Cost = $27,129

$9,234 + Fixed Cost = $27,129

Fixed Cost = $27,129 - $9,234 = $17,895

Part 1 – Total Amount of fixed costs = $17,895

Part 2 – Variable Cost per unit = $243 per unit

Part 3 –

Total Costs if restaurant was cleaned 50 times in December = Variable Costs (50 times * $243) + Fixed Costs $17,895

= $30,045

Part 4 –

Total Cost related to hiring of cleaning outside company cleaning one time the restaurant = 4,000 Square feet x $0.17 per square feet

= $680

Total number of times cleaning in December = 45 times

Total Cost from cleaning outside company = 45 times x $680 = $30,600

In house total cleaning cost = Variable Cost 45*243 + Fixed Costs $17,895

= $28,830

No, the Outback will not save money with the outside cleaning company during December

Part 5 –

The company will be indifferent where In house cleaning cost equal to the outside cleaning cost.

Outside Cleaning Cost at cleaning 45 times = $30,600

In house cleaning cost at indifferent level = Variable Cost (Number of clearing time * $243) + Fixed Costs 17,895

Equation will be as follows:

Number of times cleaning * $243 + Fixed Cost $17,895= $30,600

Number of times cleaning * 243 = $12,705

Number of times cleaning at indifferent level = 12,705 / 243 = 53 times

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