Question

onathan Macintosh is a highly successful Pennsylvania orchardman who has formed his own company to produce and package applesauce. Apples can be stored for several months in cold storage, so applesauce production is relatively uniform throughout the year. The recently hired controller for the firm is about to apply the high-low method in estimating the company’s energy cost behavior. The following costs were incurred during the past 12 months:

Month	Pints of Applesauce Produced		Energy Cost
January	112,000		$	70,900
February	70,000			62,200
March	73,000			67,400
April	79,000			68,400
May	97,000			69,400
June	103,000			70,400
July	127,000			70,600
August	97,000			69,100
September	97,000			69,700
October	91,000			68,800
November	130,000			73,000
December	124,000			71,550

Required:

1. Use the high-low method to estimate the company’s energy cost behavior and express it in equation form. Use the formula Y = a+ bX, where Y denotes energy cost for a month and X denotes pints of applesauce produced.

Total energy cost =

2. Predict the energy cost for a month in which 81,000 pints of applesauce are produced.

Answer 1

Variable cost = (Cost at highest activity - Cost at lowest activity) /(Highest activity-Lowest activity)

= (73,000-62,200)/(130,000-70,000)

= 0.18

Fixed cost = 73,000 - (130,000*0.18) = 49,600

Total energy cost = 49,600 + 0.18X

​​​​​​​​​​​​.

Energy cost = 49,600 + (0.18*81,000)

= 64,180