Question

Michael owns a machine shop. In reviewing the shop's utility bills for the past 12 months, he found that the highest bill of $2,400 occurred in August when the machines worked 1,000 machine hours. The lowest utility bill of $2,200 occurred in December when the machines worked 500 machine hours.
Requirement:
1. Calculate the variable rate per machine hour and the total fixed utility cost.
2. Show the equation for determining total utility cost for the machine shop.
3. If Matt anticipates using 1, 200 machine hours in January, predict the shop's total utility bill using the equation from Requirement 2.

Answer 1

Answer:

Instructions are below.

Explanation:

Giving the following information:

Highest cost= $2,400 when the machines worked 1,000 machine hours.

Lowest cost= $2,200 when the machines worked 500 machine hours.

To calculate the variable cost per unit and total fixed costs, we need to use the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (2,400 - 2,200) / (1,000 - 500)

Variable cost per unit= $0.4 per hour

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 2,400 - (0.4*1,000)= $2,000

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 2,200 - (0.4*500)= $2,000

Total cost= 2,000 + 0.4x

x= machine hour

Finally, the total cost for 1,200 machine hours:

Total cost= 2,000 + 0.4*1,200

Total cost= $2,480