Cornerstones of Managerial Accounting 4th Edition by Maryanne Mowen, Don Hansen, Dan Heitger

Exercise 23

Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed but found that tanning salon costs increased with the number of appointments. Costs for this service over the past eight months are as follows:
High-Low Method
Refer to the information for Luisa Crimini above.
Required:
1. Which month represents the high point The low point
2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month.
3. Using your answers to Requirement 2, write the cost formula for tanning services.
4. Calculate the total predicted cost of tanning services for September for 2,500 appointments using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September How much is the total predicted variable cost for September
5. Conceptual Connection: Identify and briefly explain any additional issues that Luisa might be wise to consider when using the high-low method to estimate the costs of her tanning salon.