Question

The controller of Carla Vista Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs.
Total Electricity Costs Total Machine Hours
January $2,650 200
February 3,100 320
March 3,570 450
April 4,750 695
May 3,160 500
June 4,910 750
July 4,130 630
August 3,810 580
September 5,060 680
October 4,390 610
November 3,290 320
December 8,920 770
(a) Determine the fixed and variable cost components using the high-low method.
(b) What electricity cost does the cost equation estimate for a level of activity of 450 machine hours?
(c) What electricity cost does the cost equation estimate for a level of activity of 750 machine hours?

Answer 1

Answer:

Results are below.

Explanation:

Giving the following information:

January $2,650 200

February 3,100 320

March 3,570 450

April 4,750 695

May 3,160 500

June 4,910 750

July 4,130 630

August 3,810 580

September 5,060 680

October 4,390 610

November 3,290 320

December 8,920 770

To calculate the variable and fixed components using the high-low method, 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= (8,920 - 2,650) / (770 - 200)

Variable cost per unit= $11

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

Fixed costs= 8,920 - (11*770)

Fixed costs= $450

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

Fixed costs= 2,650 - (11*200)

Fixed costs= $450

Now, the total cost if the machine hours equals 450:

Total cost= 11*450 + 450= $5,400

Finally, 750 hours:

Total cost= 11*750 + 450= $8,700