 Hello in this lecture, we're going to do a calculation to find the variable cost per sales dollar The goal of this is to take the total costs over here and break out the variable cost portion and the fixed cost portion So as we know it becomes very important to break out cost by behavior And if we know it's the exact behavior if it's variable cost or if it's a fixed cost That's not a problem, but there's gonna be many areas where we're not quite sure it might be a mixed cost We might not know exactly the variable or fixed portion And we may need to do some type of estimation in order to break out a variable and fixed portion for various reasons And so in this case if we have a data set like this in this case We have the total cost over here Well, we're trying to figure out are basically the variable portion and once we find the variable portion We can then figure out what the fixed portion would be that's going to be the attempt We're going to use kind of an estimate being the high low method Meaning we're going to take the high point compared to the low point and come up with a in this case variable cost per sales dollar and Use that in order to break out the variable cost and then Determine the fixed cost so let's see how this would work So we're going to take the formula up here Which is going to be the cost at the high point minus the cost at the low point Over the volume at the high point minus the volume at the low point So in this case the costs are going to be here That's what we're trying to break out between the high and low point and the volume in this case is going to be the sales dollars So here's the sales dollars and we're going to use that for the denominator in this case So let's let's do this. So first we're going to say the cost at the high point So we could look through this data set and say hmm Where's the high point here not a very big data set But it's a lot nicer and it could be useful in other cases when we have more data to use the formula of Equals the max so we're looking for the max number So I'm going to say max of these numbers here is going to give us the 249 does that make sense that 249 looks like the biggest number in the data set makes sense I'm going to say all right. We're going to take that number and I'm going to say minus The men so I'm going to say equals the men or the smallest number Using our formula Highlighting this data set once again. We're going to say the smallest number in the cost is the 61. Yeah, that looks about right So we're gonna say, okay, that looks good and then on The denominator we got the volume and that's going to be sales in this case So we're going to say I'm saying equals the max of The volume the max of these numbers and that of course is going to be related to the max of the cost Most likely and that's going to be the 356 and it really should be if it's not then we may have a problem but then we're going to say minus and we're going to say this equals the men of The sales here the men of these numbers and that's going to be the 75 to right there So we have that Okay, and then we're going to say that equals and tab now what they're going to do the next step of our algebraic equation We're going to subtract the The numerator and the denominator so it's going to be our second step So then we're going to take the 249 136 minus the 61,000 Enter that's going to be over the equals the 356 minus the 75 to and that's going to be the 188 136 divided by or over the 288 100 and that's going to equal and we're going to do the final calculation over here Which is going to equal the 188 136 divided by The 288 100 so we just plug those numbers in and that's what we get we get 67 cents so the variable cost per sales dollar. We're saying is 67 cents per sales dollar So if we took the variable cost then if we were going to estimate the variable cost We'd say okay Well, that's the in this case the variable portion on that would be the sales dollars to 356 thousand times 67 cents being the variable portion and then the difference is going to be the fixed portion of This number here the difference between the variable portion and the total So we'll do that calculation to kind of prove that down here that same calculation To prove that that's the case at the high point and the low point meaning this is a good number to use as basically an average An estimate okay, also note that we formatted this here to have decimals so if you went to the home tab and You went to the numbers and you added the decimals like this Otherwise it would just be a one as we add decimals also note that if it wasn't even in and just 67 cents then you'd have a rounded number and that's going to cause you problems when you do the final calculation You could be off by by some a small amount because of of course rounding so always keep that in mind when you're trying to prove These calculations so now what we're going to do is we're going to take that this number at the high point and the low point We're going to calculate the variable cost and the fixed cost of the high point and the low point and See that what will happen is the fixed cost portion will be the same Which is kind of at those two extreme points, which is what we would expect The fixed cost to be the same and therefore it's a good kind of estimate to use so in order to do that We're going to calculate the the high low method the fixed cost at the high point here We're going to start off with the total cost at the high so I'm going to put this in the outer column We already know what that is of course That's going to be this number, but we're going to use that max function again Or I'm going to use it because it's such a nice thing to use I'm going to say the high point is going to be this of these numbers. What's the high max there? It's going to be the two forty nine one thirty six then we're going to calculate the Very the variable cost at the high point So the variable cost is going to be this this variable cost in sales Times the variable cost per sales dollar. So I'm going to pull this into the inside I'm going to put a colon and then I'm under this I'm going to say the volume at the high point the volume being in terms of sales dollars this column I'm going to go to the home tab I'm going to go to the alignment and indent that and then I'm going to say this equals the max once again of the sales dollars here and that's going to give us the 356 and we of course are going to multiply that times the variable cost per sales dollar that we calculated up here So I'm going to hit tab we're going to say that equals and I'm just going to point to this number here and enter Why did it come out to one because we have to go to the home tab? We've got to go to the numbers and we've got to add the decimals to have the 67 cents Also going to go to the home tab font and underline that and I'm going to click on here and go to the home tab And the alignment and indent that that's going to give us the total cost at the high point So that gives us the total variable cost at the high point because the total cost is up here So it's total variable. So I'm going to put that in the outer column now. So I'm going to say that equals the 356,000 times the 67 cents variable cost per sales dollar And we're going to say that that is the variable portion. I'm going to go ahead go to the home tab And underline that this is the total at this point in terms of cost This is what we are estimating to be the variable portion based on the volume or sales times the variable cost per sale dollar Therefore, if we take the total minus the variable portion, we will get the fixed Cost the fixed portion will be equal to the 249 136 minus I'm going to hit the up arrow so we could see it that number So obviously this calculation is this number minus this number or the total cost minus the variable portion Means we have the fixed portion that'll be the fixed cost So we did that for the high point for this point now We're going to do the same thing for this point and we'll see that the variable cost will change dramatically Of course, because that's the thing that should differ and what will not change will be the fixed portion because it should be fixed That's what we're hoping to happen at these two extreme high and low points So we're going to have the total cost at the low point same calculations I'm going to put that on the far end. I'm going to say equals the the min so the min Of and of course, we know what it's going to be. It's going to be that 61 But it's it's just so nice to use the formula. So I'm going to say there it is There's the 61 then we're going to have the variable cost at the low point I'm going to put our colon here. We're going to indent and then the calculation is going to be The volume at the low point in terms of dollars times, of course our variable cost per sales dollar So volume at the low point. I'm going to hit tab. We already know what it's going to be It's going to be that 75 too, but I'm going to use equal the min Function just to emphasize the fact that it's going to be the smallest of this data group And just because it's it's fun to use the min formula All right, and then we're going to say that variable cost per sale Dump, this is going to be equal to the same portion of the calculation up here variable cost per sales And there we have that I'm going to highlight these two. We're going to go to the home tab We're going to go to the alignment and indent and we're going to get this number, of course from equal to This same number here or it's the same calculation up here Okay, so why is it one because we need to add decimals? We also need to underline it. It needs to look just like that so why don't we just go to that one and go to the I can go to the home tab and say hit the paint brush And then go back here and paint brush it into the format adding the decimals and the underline Which is nice that'll give us the total variable cost at the high point or the low point So i'm going to tab over here the total variable cost at the low point is going to equal the volume in terms of sales dollars In this case times the variable cost per sales dollar and enter i'm going to go back on there We're going to go to the home tab We're going to hit the underline and if this is the total and this is the variable the difference should be the fixed cost And we're hoping the fixed cost comes out to what we're hoping this fixed cost comes out to 10 616 the same as it did for the high point That's going to be the idea notice the variable costs are very different We would expect that to be the case if we had the perfect breakout of variable and fixed portion And we would expect the fixed portion to be The same so fixed cost the fixed cost is going to equal the total Minus the variable portion and enter and we get that same 10 616 And that's going to be the idea so the idea being that If we use the high low method at the two extremes at the high point and the low point if we use the variable cost per Sales dollar then we come up to the same fixed cost Which means it seems like a good estimate for all points since it's basically an average in that way