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: Month January February March April May June July August September October November December Pints of Applesauce Produced 107,000 65,000 68,000 74,000 92,000 98,000 122,000 92,000 92,000 86,000 125,000 119,000 Energy Cost $70,400 64,700 66,400 67,650 68,900 70,150 70,100 68,600 69,200 68,300 72,500 71,300 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. 2. Predict the energy cost for a month in which 76,000 pints of applesauce are produced.

Answer 1

Solution 1:

Variable cost per pint = (Cost at highest Pints level - Cost at lowest pints level) / (Highest Pints - lowest pints)

= ($72500 - $64700) / (125000 - 65000) = $7800 / 60000 = $0.13 per pint of applesauce produced

Fixed cost per month= Total cost - variable cost = $72500 - (125000*$0.13) = $56,250

Formula:

y= a + bX

Total cost = $15,840 + $0.16 per pint of applesauce produced

Solution 3:

Energy cost at 76000 pints of applesauce produced = $56,250 + ($0.13*76000) = $66,130