Question

Shannon Corporation wants to find an equation to estimate some of their monthly operating costs for the operating budget for 2018. The following cost and other data were gathered for 2017​:

	Maintenance	Machine	Health	Number of	Shipping	Units
Month	Costs	Hours	Insurance	Employees	Costs	Shipped
January	$4,570	159	$8,620	64	$21,180	7,060
February	$4,565	90	$8,620	71	$24,540	8,180
March	$4,655	237	$8,620	93	$23,760	7,920
April	$4,800	313	$8,620	107	$19,440	6,480
May	$5,160	456	$8,620	88	$17,790	5,930
June	$4,723	290	$8,620	90	$27,600	9,200
July	$4,905	337	$8,620	97	$26,280	8,760
August	$4,921	356	$8,620	86	$25,380	8,460
September	$5,044	427	$8,620	98	$20,220	6,740
October	$5,282	481	$8,620	107	$21,450	7,150
November	$5,665	530	$8,620	96	$16,860	5,620
December	$4,751	274	$8,620	102	$29,040	9,680

1.	Which of the preceding costs is​ variable? Fixed?​ Mixed? Explain.
2.	Using the​ high-low method, determine the cost function for each cost.
3.	Combine the preceding information to get a monthly operating cost function for the Shannon Corporation.
4.	Next​ month, Shannon expects to use 420 machine​ hours, have 120 employees, and ship 9,500 units. Estimate the total operating cost for the month.

Requirement 2. Using the​ high-low method, determine the cost function for each cost.

Begin by selecting the general formula that represents the linear cost function for each cost.

Maintenance	y = a + bX
Health insurance	y = a
Shipping costs	y = bX

Now determine the cost function for each cost. ​(Enter all values in the same format as the general linear formula. If a box is not used in the​ equation, leave the box​ empty; do not enter a zero or select a​ label.)

Cost function
Maintenance	y =		+		per machine hour
Health insurance	y =		+
Shipping costs	y =		+		per unit shipped

Requirement 3. Combine the preceding information to get a monthly operating cost function for the Shannon Corporation.

Monthly
operating cost	=		+		per machine hour	+		per unit shipped

Requirement 4. Next​ month, Shannon expects to use 420 machine​ hours, have 120 employees, and ship 9,500 units. Estimate the total operating cost for the month.

Monthly operating cost

= $

Answer 1

1)variable cost varies directly with output thus it remains constant constant in per unit. Fixed cost remains constant in totality irrespective of output .

Mixed cost is a cost that is neither constant in per unit (variable )nor in totality (fixed) .

Maintenance cost	Mixed cost
Health insurance	Fixed cost
Shipping cost	Variable cost

2)

Maintenance cost :

	Highest activity	Lowest activity	Change [A-B]
Change in cost	5665	4565	1100
Change in activity	530	90	440

y= 4340+ 2.5x where x is number of machine hours

Variable cost per machine hours =change in cost /change in machine hours

                         = 1100 /440

                         = $ 2.5 per machine hour

Highest activity :

Fixed cost = Total cost - total variable cost

                 = 5665 - (530 *2.5)

                  = 5665 - 1325

                  = 4340

can also check at lowest activity >

b)Health insurance (y)= 8620

c)shipping cost(y)=total cost for Jan /total number of units shipped

                      = 21180/7060

                        = $ 3 per unit

y= 0+ 3x

>can also check at any month ,it is $ 3 per unit

3)

Total cost(y) = Total fixed cost +total variable cost

   Y = (4340+8620) + 2.5 per machine hour + 3 per unit shipped

   Y= 12960 + 2.5 per machine hour + 3 per unit shipped

4)Monthly operating cost = 12960 + (2.5*420)+(3*9500)

                          = 12960 +1050 + 28500

                         = $ 42510