VARIABLE AND FIXED COSTS, COST FORMULA, HIGH-LOW METHOD
Li Ming Yuan and Tiffany Shaden are the department heads for the accounting depart- ment and human resources department, respectively, at a large textile firm in the south- ern United States. They have just returned from an executive meeting at which the necessity of cutting costs and gaining efficiency has been stressed. After talking with Tif- fany and some of her staff members, as well as his own staff members, Li Ming discovered that there were a number of costs associated with the claims processing activity. These costs included the salaries of the two paralegals who worked full-time on claims process- ing; the salary of the accountant who cut the checks; the cost of claims forms, checks, envelopes, and postage; and depreciation on the office equipment dedicated to the proc- essing. Some of the paralegals' time is spent in the routine processing of uncontested claims, but much time is spent on the claims that have incomplete documentation or are contested. The accountant's time appears to vary with the number of claims processed.
Li 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 claims processing cost and the number of claims processed per month for the past six months. These data are as follows:
|
Month
|
Claims Processing Cost ($)
|
Number of Claims Processed
|
|
February
|
34,907
|
5,700
|
|
March
|
31,260
|
4,900
|
|
April
|
37,950
|
6,100
|
|
May
|
38,250
|
6,500
|
|
June
|
44,895
|
7,930
|
|
July
|
44,055
|
7,514
|
Required:
1. Classify the claims processing costs that Li Ming identified as variable and fixed.
2. What is the independent variable? The dependent variable?
3. Use the high-low method to find the fixed cost per month and the variable rate. What is the cost formula?
4. Suppose that an outside company bids on the claims processing business. The bid price is $4.60 per claim. If Tiffany expects 75,600 claims next year, should she out-source the claims processing or continue to do it in house?