Variable and Fixed Costs, Cost Formula, High-Low Method Li Ming Yuan and Tiffany Shaden are the department heads for the accounting department and human resources department, respectively at a large testle the other United States. They have just returned from an executive meeting at which the necessity of cutting costs and gaining licency has been stressed Ar e ndom of her staff members, as well as his own staff members, U Ming discovered that there were a number of costs associated with the claims processing activity. The concluded the salaries of the two paralegals who worked full time on claims processing, the salary of the accountant who cut the checks, the cost of claims forms, check, anvelopes, and postage and depreciation on the office equipment dedicated to the processing. Some of the paralegals' time appears to vary with the routine processing of uncontested claims, but considerable time also appears to be spent on the claims that have incomplete documentation or are contested. The accountant's time appears to vary with the number of claims processed. Ming was able to separate the costs of processing claims from the costs of running the departments of accounting and human resources. He gathered the data on cum processing cost and the number of claims processed per month for the past 6 months. These data are as follows: Number of Claims Processed Month Claims Processing Cost February 5,700 March $34,907 31,260 37,950 4,900 April 6,100 May 38,250 6,500 June 44,895 7,930 7,514 July 44,055 Required: 1. Classify the claims processing costs that Ming identified as variable and fed. Salaries of the two paralegals times the percentage of time spent in processing uncontested claims Variable costs Salaries of the two paralegals times the percentage of time spent in handling contested claims Depreciation on office equipment used in claims processing activity h a s the percentage of time spent in the cas processing activity Required: 1. Classify the claims processing costs that Li Ming identified as variable and fixed. Salaries of the two paralegals times the percentage of time spent in processing uncontested claims Variable costs Salaries of the two paralegals times the percentage of time spent in handling contested claims Fixed costs Depreciation on office equipment used in claims processing activity Fixed costs Salary of the accountant times the percentage of time spent in the claims processing activity Variable costs Cost of claims forms Variable costs Checks Variable costs Envelopes Variable costs Postage Variable costs 2. What is the independent variable? Number of claims What is the dependent variable? Cost of claims processing 3. Use the high-low method to find the fixed cost per month 8 9,148 x Use the high-low method to find the variable rate. Round to two decimal places $ 1,814 X per claim What is the cost formula? Total cost of claims processing - $ 34,907 X +( 5 9,148 X per unit * Claims ) 4. Conceptual Connection: Suppose that an outside company bids on the claims processing business. The bid price is $4.60 per claim. If Tiffany expects 75, should she outsource the claims processing or continue to do it in-house? Outsource the claims processing
