[kgarant]

Can someone please explain how to calculate this math?
Campus Copy & Printing wants to predict copy machine repair expense at different levels of copying activity (number of copies made). The following data have been gathered:



Copy Machine
Month Repair Expense Copies Made
May $12,597 444,600
June 18,525 741,000
July 30,381 1,333,800
August 24,453 1,037,400
September 15,561 592,800

Determine the fixed and variable components of repair expense using the high-low method. Use copies made as the measure of activity. (Enter variable cost per dollar to 2 decimal places, e.g. 0.52.)

[ArcSine]

The basic idea is that the total repair expense in any given month consists of some fixed amount (which never changes regardless of how many copies are run), plus some variable component which is a function of the copy count. The idea continues with estimating these two amounts using actual data from past months.

Normally you'd apply a linear regression against all the data points to get the best estimation, but the Hi-Lo method is very easy, and is a carryover from the days before everyone had linear regression capability at their fingertips in the form of Excel.

OK, here's the drill, using a simple example: In my lowest month I produced 10 units and my cost was $50. In my highest month I produced 15 units and my total cost was $60. Since it cost me an extra $10 to produce 5 more units, my variable cost must be $2 per unit.

Then I can determine my fixed cost using either of the two months. Knowing that my variable cost is $2 / unit, my total variable cost in the low month was 10 units x $2 = $20. Since total cost (both fixed and variable) was $50 that month, the fixed cost must be $30.

Similarly, in the high month the total variable cost was 15 units x $2 per = $30. Since total cost was $60 that month, fixed cost must've been $30 (agreeing with the previous paragraph, as it should).