High-Low Method

Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased with the number of appointments. Costs for this service over the past 8 months are as follows:

		Tanning
Month		Appointments			Total Cost
January		700			$1,754
February		1,900			$2,150
March		3,100			$2,690
April		2,500			$2,300
May		1,500			$1,700
June		2,300			$2,285
July		2,150			$2,200
August		2,900			$2,620

Required:

1. Which month represents the high point? The low point?

highpoint: ______

lowpoint: ______

2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month. Round the variable rate per tanning appointment to the nearest cent and use it in your further calculations. Round the fixed cost per month to the nearest dollar and use it in your further calculations. In your calculations, round per unit costs to the nearest cent.

Variable rate for tanning: $______ per tanning appointment

Fixed cost per month: $______

3. Using the variable rate and fixed cost, what is the cost formula for tanning services?

a. Total tanning service cost = $2420 + ($0.37 x Number of appointments)

b. Total tanning service cost = $2420 - ($0.37 x Number of appointments)

c. Total tanning service cost = $1481 + ($0.39 x Number of appointments)

d. Total tanning service cost = $1481 - ($0.39 x Number of appointments)

4. Calculate the total predicted cost of tanning services for September for 2,400 appointments using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September? How much is the total predicted variable cost for September? If required, round the final answers to the nearest dollar.

1. Total predicted cost for September	$______
   Total fixed cost for September	$______
   Total predicted variable cost for September	$______

   5. Which of the following statements is correct when luisa uses the high-low method to estimate the costs?

   1. High-low method is based on only two data points and ignores all of the other data.

2. Luisa might be wise to calculate the cost formula 6 to 12 months later after a longer time period has elapsed since starting the tanning business.

3. It appears there is significant excess tanning bed capacity in slow months or machines are being run to their utmost capacity in busy months. This might lead to greater machine breakdown and maintenance costs.

4. All of the above.