Compton Company is a wholesale distributor of educational CD-ROMs. The company's records indicate the following:$\begin{array}{lrr}
&\text { This Year}&\text { Last Year }\
\text { Units Sold } &250,000&200,000\
\text { Sales Revenue } & £ 1,250,000 &£ 1,000,000\
\text { Less: Cost of Goods Sold } &\underline{875,000} &\underline{ 700,000} \
\text {Gross Margin } &375,000 & 300,000 \
\text {Less: Operating Expenses } &\underline{222,000} &\underline{210,000}\
\text {Net Operating Income } &£ 153,000& £ 90,000\
\end{array}$

-Using the high-low method of analysis, what are the company's estimated total fixed operating expenses per year?

Question

Compton Company is a wholesale distributor of educational CD-ROMs. The company's records indicate the following:$\begin{array}{lrr}
&\text { This Year}&\text { Last Year }\
  \text { Units Sold } &250,000&200,000\
 \text { Sales Revenue } & £ 1,250,000 &£ 1,000,000\
 \text { Less: Cost of Goods Sold } &\underline{875,000} &\underline{ 700,000} \
 \text {Gross Margin  } &375,000 & 300,000 \
 \text {Less: Operating Expenses  } &\underline{222,000} &\underline{210,000}\
 \text {Net Operating Income  } &£ 153,000& £ 90,000\
\end{array}$

-Using the high-low method of analysis, what are the company's estimated total fixed operating expenses per year?

Quizplus · Accepted Answer

To use the high-low method of analysis, we need to identify the highest and lowest levels of activity and their corresponding costs. From the table, we can see that the highest level of activity is 20,000 units, with a total cost of £540,000, and the lowest level of activity is 10,000 units, with a total cost of £378,000.

Using the formula for the slope of the line (change in cost divided by change in activity), we get:

Slope = (540,000 - 378,000) / (20,000 - 10,000) = 162,000

This slope represents the variable cost per unit of activity, so we need to subtract it from the total cost at either the high or low level of activity to get the estimated total fixed operating expenses:

Estimated total fixed operating expenses = Total cost - (Variable cost per unit x Level of activity)

Using the high level of activity, we get:

Estimated total fixed operating expenses = 540,000 - (162,000 x 20,000) = £150,000

Therefore, the estimated total fixed operating expenses per year for Compton Company is £150,000, which corresponds to answer choice D.

Compton Company Is a Wholesale Distributor of Educational CD-ROMs -Using the High-Low Method of Analysis, What Are the Company's