Question

The controller of Cullumber Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs. January February March April May June July August September October November December Total Total Electricity Costs Machine Hours $2,700 290 2,980 350 3,590 480 4,620 690 3,160 460 5,000 780 4,110 620 3,910 510 5,120 680 4,200 620 3,200 350 7,290 800 (a) Determine the fixed- and variable-cost components using the high-low method. Fixed-costst 4 Variable-costs जी (b) What electricity cost does the cost equation estimate for a level of activity of 480 machine hours? Electricity costs By what amount does this differ from March's observed cost for 480 machine hours? Amount differ $

Answer 1

Machine Hours Month Electricity Costs Using High-Low Method: Jan. 290 $2,700 350 480 690 Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. 460 Machine Electricity Particulars Hours Costs High 800 $7,290 Low 290 $2,700 Difference 510 $4,590 ($7290 - $2700) (800-290) Variable electricity costs per hour $9.00 (= Difference in electricity cost / Difference in machine hours = $4590 / 510 hours = $9] $2,980 $3,590 $4,620 $3,160 $5,000 $4,110 $3,910 $5,120 $4,200 $3,200 $7,290 780 620 510 680 620 350 800 At 800 machine hours, Electricity Costs Less: Variable electricity costs Fixed Electricity Costs $7,290 ($7,200) [800 x $9.00] $90 At 290 machine hours, Electricity Costs Less: Variable electricity costs Fixed Electricity Costs $2,700 ($2,610) [290 x $9.00] $90

b) $9.00 480 $4,320 [480 x $9.00] Variable electricity costs per hour Level of activity, machine hours Total variable electricity costs Add: Fixed Electricity Costs Total electricity costs estimated Observed electricity cost for 480 MHS Difference in amount $90 $4,410 $3,590 $820 [Difference between $4410 and $3590] Variable electricity costs per hour Level of activity, machine hours Total variable electricity costs Add: Fixed Electricity Costs Total electricity costs estimated Observed electricity cost for 780 MHS Difference in amount $9.00 780 $7,020 [780 x $9.00] $90 $7,110 $5,000 $2,110 [Difference between $7110 and $5000]