Question

Jonathan 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: 02-5543 Month January February March April Pints of Applesauce Produced 125,000 83,000 86.000 92.000 110.000 116.000 140,000 110,000 110.000 104,000 143,000 137,000 Energy Cost $72,200 65,300 71,200 70,350 70.700 71.050 71,900 70,400 71.000 70,100 74,300 July August September October November December a + 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 bX, where y denotes energy cost for a month and X denotes pints of applesauce produced. 2. Predict the energy cost for a month in which 94,000 pints of applesauce are produced. Complete this question by entering your answers in the tabs below.

Answer 1

Requirement 1: Compute the unit variable and total fixed costs for the equation as follows

Unit variable cost        = (Cost at the high activity level − Cost at the low activity level) ÷ (High activity level − Low activity level)

                                    = ($74,300 − $65,300) ÷ (143,000 − 83,000)

                                    = $0.15 per pints of applesauce

Total fixed cost           = Total cost − (Number of pints × Variable cost per pint)

                                    = $74,300 − (143,000 × $0.15)

                                    = $52,850

Total cost (Y) = $52,850 + $0.15 X

Requirement 2: Compute total cost as follows

Total cost (Y) = $52,850 + $0.15 X

= $52,850 + ($0.15 × 94,000 pints)

= $52,850 + $14,100

= $66,950