Question

FREE RESPONSE SECTION (40 POINTS) 1. (8 POINTS) A publishing company makes textbooks. It believes that the machine hours of the printing press are the main cost driver for the total printing costs. It has collected the following data for the operation of the printing facility: Month: Machine Hours: Total Cost: July 625 $7.950 August 300 $7.400 - September 700 $8,275 October 550 $7,625 November 775 $9.100 December 850 $9,800 - a) Using the high-low method, what is the variable cost per machine hour? 44.56 b) What is the fixed monthly cost for the operation of the printing facility? c) What is the cost equation for the printing facility? d) In January the printing facility incurred a total of 100 machine hours. What is the expected total operating cost for the printing facility for the month of January?

Answer 1

Requirement a: Calculation of variable cost using High low method To find out the variable cost using high low method we must identify the highest activity and lowest activity in terms of cost and machine hours (or units) Here lowest activity occurred in the month of august and highest activity occurred in th emonth of december. Formulae variable cost per unit = Highest activity cost - Lowest activity cost Highest activity machine hours - lowest activity machine hours $9,800 - 7,400 850 - 300 $4.36 Variable cost per unit =

Requirement b: Fixed cost = Highest activity cost - ( Variable cost x Highest activity machine hours) = $9,800 - ($4.36 x 850) = 9,800 - 3,706 = $6,094 Fixed monthly cost for the operation of the printing facility = $6,094 Requirement c: Cost equation Total cost = Fixed cost +(variable cost x machine hours) Requirement d: 100 machine hours incurred in the month of january. Variable cost perhour = $4.36 Fixed cost = $6,094 Total operating cost = Fixed cost +(variable cost x machine hours) = $6,094 + ( $4.36 x 100) = $6,530