In a month when a hotel's laundry department processes 30,000 kgs of laundry, the laundry operating costs are $17,000. In a month when it processes 20,000 kgs of laundry, the laundry operating costs are $14,000. Use the high-low method to determine the laundry department's fixed cost per month.

Question

Quizplus · Accepted Answer

Step 1: Determine the variable cost per kg of laundry:
Variable Cost = (High Cost - Low Cost) / (High Volume - Low Volume)
Variable Cost = ($17,000 - $14,000) / (30,000 kgs - 20,000 kgs)
Variable Cost = $3,000 / 10,000 kgs
Variable Cost = $0.30 per kg

Step 2: Calculate the fixed cost using either the high or low volume and cost:
Fixed Cost = Total Cost - (Variable Cost x Volume)
Using the high volume and cost:
Fixed Cost = $17,000 - ($0.30 x 30,000 kgs)
Fixed Cost = $17,000 - $9,000
Fixed Cost = $8,000

Using the low volume and cost:
Fixed Cost = $14,000 - ($0.30 x 20,000 kgs)
Fixed Cost = $14,000 - $6,000
Fixed Cost = $8,000

The fixed cost per month for the laundry department is $8,000.

In a Month When a Hotel's Laundry Department Processes 30,000