In a month when a hotel's laundry department processes 10,000 kgs of laundry, the laundry operating costs are $15,000. In a month when it processes 20,000 kgs of laundry, the laundry operating costs are $20,000. Use the high-low method to determine the laundry department's fixed cost per month.

Question

Quizplus · Accepted Answer

First, we need to find the variable cost per kg of laundry. To do this, we use the formula:

Variable cost per kg = (high total cost - low total cost) / (high volume - low volume)

In this case, the high volume is 20,000 kgs, the low volume is 10,000 kgs, the high total cost is $20,000, and the low total cost is $15,000.

Plugging these values into the formula, we get:

Variable cost per kg = ($20,000 - $15,000) / (20,000 kgs - 10,000 kgs)
Variable cost per kg = $5,000 / 10,000 kgs
Variable cost per kg = $0.50/kg

Now we can use the formula for total cost to find the fixed cost:

Total cost = Variable cost per kg × Volume + Fixed cost

We can use either of the two sets of data to solve for the fixed cost. Let's use the lower volume data:

$15,000 = $0.50/kg × 10,000 kgs + Fixed cost
$15,000 = $5,000 + Fixed cost
Fixed cost = $15,000 - $5,000
Fixed cost = $10,000

Therefore, the monthly fixed cost is $10,000. Answer choice C is correct.

In a Month When a Hotel's Laundry Department Processes 10,000