In a month when a hotel's laundry department processes 20,000 kgs of laundry, the laundry operating costs are $15,000. In a month when it processes 25,000 kgs of laundry, the laundry operating costs are $17,500. Use the high-low method to determine the laundry department's fixed cost per month.

Question

Quizplus · Accepted Answer

Using the high-low method, we first need to determine the variable cost per weight of laundry.

Variable cost per kg of laundry = (Total cost at high activity level – Total cost at low activity level) ÷ (High activity level – Low activity level) 
= ($17,500 – $15,000) ÷ (25,000 kg – 20,000 kg)
= $2.50 per kg

Next, we can use either the high or low activity level to determine the fixed cost. We will use the low activity level:

Fixed cost = Total cost at low activity level – (Variable cost per kg x Low activity level) 
= $15,000 – ($2.50 x 20,000 kg) 
= $5,000

Therefore, the monthly fixed cost of the laundry department is $5,000.

In a Month When a Hotel's Laundry Department Processes 20,000