Question

Exercise 171 Moresan Co. gathered the following Information on power costs and factory machine usage for the last six months: Month January February March April May June Power Cost $24,400 30,400 29,000 22,340 19,900 16,900 Factory Machine Hours 13,900 17,600 16,800 13,200 11,600 8,600 Using the high-low method of analyzing costs, answer the following questions. What is the estimated variable portion of power costs per factory machine hour? (Round answer to 2 decimal places, e.g. 15.25.) Variable power costs per factory machine hour What is the estimated fixed power cost each month? High Low Fixed power costs If it is estimated that 10,000 factory machine hours will be run in July, what is the expected total power cost for July? Total power cost

Answer 1

Ans : The high-low is a technique used to bifurcate the costs into fixed and variable costs.

a) Vairable power costs per hr = (Highest Power Cost - Lowest Power Cost) / (Highest M/c hrs - Lowest machine hrs)
= ($30,400 - $16,900) / (17,600 - 8,600)
= $13,500 / 9000hrs
= $1.5 per factory machine hr

Ans : Variable power cost is $1.5 per factory machine hr.

b) Estimated Fixed Cost

High Fixed Power Cost = Highest Power Cost - ( Variable cost per hr * Highest machine hrs)
= $30,400 - (1.5 per factory machine hr * 17,600 hrs)
= $30,400 - $26,400
= $4,000

Low Fixed Power Cost = Lowest Power Cost - (Variable cost per hr * Lowest machine hrs)
= $16,900 - (1.5 per factory machine hr * 8,600 hrs)
= $16,900 - $12,900
= $4,000

Using either high or low activity cost should yield approximately the same fixed cost value. Using highest and lowest hrs have yeild the same fixed cost of $4,000.

c) Expected Total Power Cost for July

Total Power Cost = Fixed Cost + (Variable Cost per hr * Factory Machine hrs)
= $4,000 + (1.5 per factory machine hr * 10,000 hrs)
= $4,000 + $15,000
= $19,000

Ans : Total Power Cost for the month of July is $19,000.