Question

Question 11 (25 points) Electrical costs at one of Kantola Corporation's factories are listed below: Electrical cost Machine-hours February 2,570 $48,405 2,480 March $47,493 April 2,053 $46,302 May $49,833 2,627 $45,800 June 2,325 $44,366 July 2,065 $43,237 August 2,048 $40,833 September 2,027 $42,577 October 2,293 Management believes that electrical cost is a mixed cost that depends on machine-hours. Use the high-low method to estimate the variable and fixed components of this cost. 1. Variable Cost per unit 2. Fixed Cost

Answer 1

Ans. 1	High low method: This method is based on the highest level of cost and equity & the lowest level of cost and equity.
	Variable cost per unit = (Highest cost - Lowest cost) / (Highest machine hours - Lowest machine hours)
		($49,833 - $40,833) / (2,627 - 2,027)
		$9,000 / 600
		$15 per unit
Ans. 2	Fixed cost =   Total cost - (Variable cost per unit * Activity level)
	Fixed cost can be calculated on the base of highest and lowest units.
	Highest units	Lowest units
	$49,833 - ($15 * 2,627)	$40,833 - ($15 * 2,027)
	$49,833 - $39,405	$40,833 - $30,405
	$10,428	$10,428
	So the fixed cost   =   $10,428.