Question

Martha’s Vineyard Marine Supply is a wholesaler for a large variety of boating and fishing equipment. The company’s controller, Mathew Knight, has recently completed a cost study of the firm’s material-handling department in which he used work measurement to quantify the department’s activity. The control factor unit used in the work-measurement study was hundreds of pounds of equipment unloaded or loaded at the company’s loading dock. Knight compiled the following data.

	Units of Activity
Month	(hundreds of pounds of equipment loaded or unloaded)			Material-Handling Department Costs
January		3,000		$	12,900
February		2,800			12,500
March		2,500			11,850
April		2,200			11,400
May		3,400			12,300
June		3,600			14,350
July		3,200			13,200
August		3,000			12,600
September		3,800			13,560
October		2,300			11,650
November		2,400			12,550
December		2,600			12,550

3. Predict the firm’s material-handling department’s costs for a month when 2,000 units of activity are recorded. (Do not round intermediate calculations. Round variable cost per unit to 2 decimal places and final answer to the nearest whole dollar amount.)

Answer 1

Using High-Low Method

High-Low Method	Units of Activity	Material-Handling Department Costs
High activity level	3800	13560
Low activity level	2200	11400
Change	1600	2160

Variable cost = (cost of highest activity – cost of lowest activity)/(highest activity – lowest activity) = (13560-11400)/(3800-2000) = 2160/1600 =$1.35 per unit

Fixed costs = total cost – total variable cost = 13560-(3800*1.35) = $8430

Cost function: Y=a+bX

Therefore,

Y = $8430 + $1.35X

Now,

firm’s material-handling department’s costs for a month when 2,000 units of activity are recorded = 8430+(2000*1.35) = $11130