Question

The controller of Ivanhoe Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs. Total Electricity Costs Total Machine Hours January $2,300 270 February 2,920 390 March 3,500 500 April 4,780 690 May 3,230 450 June 4,920 790 July 4,010 625 August 3,870 530 September 5,050 665 October 4,260 625 November 3,220 390 December 6,080 810 Determine the fixed- and variable-cost components using the high-low method. Fixed-costs $ Variable-costs $ Link to Text Link to Video What electricity cost does the cost equation estimate for a level of activity of 500 machine hours? Electricity costs $ By what amount does this differ from March’s observed cost for 500 machine hours? Amount differ $ Link to Text Link to Video What electricity cost does the cost equation estimate for a level of activity of 790 machine hours? Electricity costs $ By what amount does this differ from June’s observed cost for 790 machine hours? Amount differ $

Answer 1

Computation of Variable cost per Unit using High Low Method

Variable cost per Unit= ( Cost at Highest Volume- Cost at Lowest Volume)/( Highest olume- Lowest Volume)

=(6080-2300)/(810-270)= $7 per Machien Hour

Totla Fixed Cost = 6080-(810X7)= $410

Variable Cost = 810*7=$5670

Part-2

cost for500 Hour = (7*500+410)= $3910

Part-3

Difference in March Cost for 500 Hour = $3910-$3500= $410

Part-4

cost for790 Hour = (7*790+410)= $5940

Part-5

Difference in June Cost for 790 Hour = $5940-$4920= $1020