Question

ALHIEVE ENG HA2011 REVISION QUESTIONS Question 1 (15 marks) - Topic 2 Inspire Limited, a management consultancy a management consultancy firm. has operating hours fluctuate from week to week. Its IT cost and hours of operation for the last six weeks are Week Hours of operation e last six weeks are as follow: IT cost 45 1,010 1,380 64 1,470 70 5 1,440 45 980 40 960 Required: a) Use the high-low method to estimate the cost behaviour for the firm's power costs, assuming that variable costs vary in proportion to the hours of operation. EXP the cost behaviour in a cost function (Y = a + bx). (10 marks) b) During the second week of November, Inspire Limited will be opened for 51 hours. Predict the firm's total IT cost for the week. (5 marks) (10 + 5 = 15 marks)

Answer 1

Step 1: Identify the highest and lowest activities

  The highest activity level is 70 Hours in week 4.
  The lowest activity level is 40 Hours in week 6.

Step 2: Calculate variable cost per unit

Difference between highest and lowest activity units and their corresponding costs are used to calculate the variable cost per unit using the formula given above.

Variable cost per unit = (1440-960)/ (70-40)

= 480/30

= 16 per unit

Step 3: Calculate fixed cost

Fixed costs can be found by deducting the total variable cost for a given activity level (i.e. 70 or 40) from the total cost of that activity level.

Fixed cost = 1440 - (16 x 70) = 320

Step 4: Calculate the total variable cost for new activity

Simply multiplying the variable cost per unit (Step 2) by the number of units expected to be produced in Nov gives us the total variable cost for that month.

Total variable cost = 16 x 51 = $ 816

Step 5: Calculate the total IT cost

Simply adding the fixed cost (Step 3) and variable cost (Step 4) gives us the total cost of in November.

Total cost = 320 + 816 = 1136