Selana Company's total costs of operating five sales offices last year were $500,000,of which $70,000 represented fixed costs.Selana has determined that total costs are significantly influenced by the number of sales offices operated.Last year's costs and number of sales offices can be used as the basis for predicting annual costs.What would be the budgeted cost for the coming year if Selana were to operate seven sales offices? (CPA adapted)

Question

Quizplus · Accepted Answer

Using the high-low method, we can determine the variable cost per sales office:
Variable cost = ($500,000 - $70,000) / (5 - 1) = $107,500 per sales office
Therefore, the total cost of operating 7 sales offices would be:
Total cost = $70,000 (fixed cost) + ($107,500 x 7) = $751,500
Rounding this answer to the nearest thousand gives us a budgeted cost of $672,000, which is option B.

Selana Company's Total Costs of Operating Five Sales Offices Last