Question

The Stone Company has observed that its utility cost is $5,000 when operating at a level of 20,000 machine hours per period. The utility cost drops to $4,000 when the operating level drops to 15,000 machine hours.
Required:

Estimate the utility cost for an operating level of 18,000 machine hours.

Answer 1

Answer:

$4,600

Explanation:

Data provided in the question:

Utility cost = $5,000

Operating level = 20,000 machine hours per period

Final utility cost = $4,000

Final operating level = 15,000

Now,

Variable cost per machine hour

= [Total cost at highest level-Total cost at lowest level] ÷ [ Highest level-Lowest level) ]

=[ 5000 - 4000 ] ÷ [ 20,000 - 15,000 ]

= $0.2 per machine hour

Therefore,

Fixed costs = $5,000 - [ 0.2 × 20,000 ]

= $1000

Total cost for 18000 machine hours

= [ 0.2 × 18,000 ] + 1000

= $4,600