Use the high low method to estimate the fixed and variable components of its maintenance cost.

PART 1: The following information is available for GFI’s maintenance cost over the last seven months. Use the high low method to estimate the fixed and variable components of its maintenance cost. Would this be an effective way to estimate these costs? Justify your answer by explaining why this is an effective way or why it is not.

Month
Operating Hours
Maintenance cost
February
27
11,000
March
54
13,800
April
36
10,200
May
45
12,000
June
63
13,800
July
72
18,000
August
19
7,400

PART 2: In 2001, Ms. Kelle, the head of aerobic equipment sales, started a fitness magazine called the Dancing Elephant. The magazine sells 50,000 copies a month. The total variable costs at that volume are $40,000 and fixed costs are $20,000. An additional storage cost of $2,000 will be incurred if production exceeds 55,000 units.

You have been asked to forecast the following costs for two possible production runs of (a) 52,000 units and (b) 57,000 units:

  • Total variable costs
  • Variable cost per unit
  • Total fixed cost
  • Fixed cost per unit
Budget
Forecast A
Forecast B
Production
50,000
52,000
57,000
Total variable costs
Variable cost per unit
Total fixed cost
Fixed cost per unit

PART 3: GFI manufacturers ping pong tables and has a JIT policy that ending inventory must equal 10 percent of the next month’s sales. It is estimated that April’s actual ending inventory will consist of 40,000 ping pong tables. May and June sales are estimated to be 400,000 and 350,000 tables respectively. Compute the number of tables to be produced that would appear on GFI’s production budget for the month of May.

Good management includes good budgeting. Explain why the bottom-up approach to budgeting is considered a more successful management technique then a top down approach. Provide an example of implementation of the bottom-up approach to budgeting.

 

Submission:

The presentation must be submitted as a Microsoft Power Point presentation adhering to the instructions provided in the opening paragraph.

Use the following file naming convention: LastnameFirstInitial_M5_A1.ppt

By Monday, October 19, 2015, deliver your assignment to the M5: Assignment 1 Dropbox.

Assignment 1 Grading Criteria
Maximum Points
Part 1: Used the high low method to estimate the fixed and variable components of its maintenance cost.
36
Part 1: Explained how this would be an effective way to estimate these costs. Justified answer by explaining why this is an effective way.
36
Part 2: Forecasted the following costs about which production run to use, based upon a production run of (a) 52,000 units and (b) 57,000 units:

  • Total variable costs
  • Variable cost per unit
  • Total fixed cost
  • Fixed cost per unit
32
Part 3: Computed the number of tables to be produced that would appear on GFI’s production budget for the month of May.
32
Part 3: Explained why the bottom up approach to budgeting is considered a more successful management technique then a top down approach. Provided an example of implementation of the bottom up approach to budgeting.
36
Part 4: Discussed and determined the costs relevant for the project. Stated whether this project is profitable based upon the information at hand.
36
Part 4: Showed your cost calculatio

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