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The controller of Chittenango Chain Company believes that the identification of the variable and fixed components of the firm’s costs will enable the firm to make better planning and control decisions. Among the costs the controller is concerned about is the behavior of indirect-materials cost. She believes there is a correlation between machine hours and the amount of indirect materials used.

A member of the controller’s staff has suggested that least-squares regression be used to determine the cost behavior of indirect materials. The regression equation shown below was developed from 40 pairs of observations.

S = $200 + $9H

where S = Total monthly cost of indirect materials

          H = Machine hours per month

5. Use the high-low method to estimate the behavior of the company’s indirect-material cost. Express the cost behavior pattern in equation form. (Round variable cost per machine hour to 2 decimal places.)

4. The high and low activity levels during the past four years, as measured by machine hours, occurred during April and August, respectively. Data concerning machine hours and indirect-materials usage follow.

	April			August
Machine hours		1,050			820
Indirect materials:
Beginning inventory	$	1,350		$	2,100
Ending inventory		1,900			4,100
Purchases		7,000			7,300

Answer 1