Question

The controller of Fortnight Co. has requested a quick estimate of the manufacturing supplies needed for the Cleveland Plant for the month of July, when production is expected to be 580,000 units to meet the ending inventory requirements and sales of 585,000 units. Fortnight Co.'s budget analyst has the following actual data for the last three months.

Month	Production in Units				Manufacturing Supplies
March		505,000			$	680,660
April		650,000				854,660
May		590,000				768,210

Using the high-low method to develop a cost estimating equation, the total estimated cost of needed manufacturing supplies for July would be: (CMA adapted)

Answer 1

Answer:

Estimated cost for July = $ 776,660

Calculation:

It is given that;

	Lowest range	Highest range
Cost	$     680,660	$      854,660
Units	505,000	650,000

Now,

As per High Low Method,
Variable cost per unit =	Change in costs / change in hours
Variable cost per unit =	($ 854660 - $ 680660) / (650000 - 505000)
Variable cost per unit =	$ 174000 / 145000
Variable cost per unit =	$ 1.20

and,

Fixed Cost =	Total Cost - Variable Cost
Fixed Cost =	Total Cost - (Variable Cost per hour * hours)
Fixed Cost =	$ 854660 - ($ 1.2 * 650000)
Fixed Cost =	$ 74,660.00

Cost equation:

y = 1.2x + 74,660

Cost for July = [1.2 * 585,000] + 74,660

= $ 776,660