Question

Problem 6-41 Work Measurement; Cost Estimation with Different Methods; Wholesaler (LO 6-1, 6-2, 6-5, 6-6)

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		1,400			$	11,350
February		1,200				11,350
March		1,100				11,050
April		2,600				12,120
May		1,800				11,400
June		2,000				12,000
July		2,400				12,550
August		2,200				11,100
September		1,000				10,200
October		1,300				11,250
November		1,600				11,300
December		1,800				11,700

Required:
5. Estimate the material-handling department’s cost behavior using the high-low method. Use an equation to express the results of this estimation method. (Round coefficient of X to 2 decimal places.)

Answer 1

5)

Variable cost per unit     = ( Costs at Highest level (-) Costs at Lowest Level )                               / ( Highest units level of Activity (-) lowest units level of Activty )     =    ( $ 12,120 (-) $ 10,200 ) / ( 2,600 (-) 1,000 )     =    $ 1,920 / 1,600     =   $ 1.20 per unit

Fixed cost =   Costs at Highest level   (-) ( Highest units level of Activity x Variable cost per unit)                        = $ 12,120 (-) ( 2,600 x $ 1.20)                        = $ 12,120 (-) $ 3,120                        =    $ 9,000

So the required equation as per estimation method is - Y = a + b X

Y = Total Cost a = Fixed Cost b = variable Cost per Unit

Y = $ 9,000 + ($ 1.20) X