ETutor is an online tutoring service provider that is particularly popular with college students. The company is interested in estimating the fixed and variable components of its tutoring services costs. The manager believes that these costs are driven by the number of hours of tutoring services provided. The following information was gathered for the last six months of business:MonthNumber of Hours Tutoring costsJanuary 25,000 $308,000 February 41,000 420,000 March 29,000 352,000 April 31,000 373,000 May 34,000 378,000 June 18,000 252,000 Required: 1) Compute the average tutoring cost per hour for the six-month period. (Round the average tutoring cost per hour to two decimal points.)2) Use the high-low method to estimate the total fixed cost

Question

and the variable cost per hour. (Round the variable cost per hour to two decimal points.)3) Name one advantage and one disadvantage of the high-low method. 4) Describe the scattergraph method that can be used to analyze mixed costs.

What will be an ideal response?

Answer 1

Answers will vary 

1) Average tutoring cost per hour:
$2,083,000 ÷ 178,000 hours = $11.70 per hour
$2,083,000 = total tutoring costs for the 6-month period; 178,000 = total number of hours

2) High-Low method of analyzing mixed costs:
Total costs = a + bX where a = total fixed costs and b = unit variable cost, and X is the cost driver or independent variable
Variable cost per hour (b) = (February costs - June costs) ÷ (February hours - June hours)
b = ($420,000 - 252,000) ÷ (41,000 - 18,000) = $7.30 per hour
Total fixed costs:
If total costs = a + bX then a = $420,000 - ($7.30 × 41,000) = $120,700
(note that answers are affected by rounding)
Thus, the cost equation would be defined as total costs = $120,700 + 7.30X, where X is the number of tutoring hours.

3) An advantage of the high-low method is its simplicity of use. The primary disadvantage is its vulnerability to inaccuracy.

4) Under the scattergraph approach data are plotted on a graph and a visual fit line is visually drawn through the points so that the total distance between the data points and the line is minimized.