Machine hours and electricity costs for AMK Industries for the past eleven months were as follows:
Month |
Electricity Costs |
Machine Hours |
January |
$12,600 |
8000 |
February |
14,333 |
9600 |
March |
9,333 |
5600 |
April |
15,667 |
10200 |
May |
19,167 |
9200 |
June |
15,134 |
13200 |
July |
16,834 |
14400 |
August |
15,500 |
12000 |
September |
10,667 |
6000 |
October |
17,667 |
13200 |
November |
21,000 |
16800 |
Required:
a. |
Using the high-low method, develop an estimate of variable electricity costs per machine hour. |
b. |
Using the high-low method, develop an estimate of fixed electricity costs per month. |
c. |
Using the high-low method, develop a cost function for monthly electricity costs. |
d. |
Estimate electricity costs for a month in which 1,200 machine hours are worked. |
a.
Variable cost per machine hour= (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)
= (21,000-9,333)/(16,800-5,600)
= 11,667/11,200
= $1.04169643 per machine hour
b.
Fixed cost = Highest activity cost - Highest activity x Variable cost per hour
= 21,000 - 16,800 x 1.0417
= 21,000-17,500
= $3,500
c.
The electricity cost function in equation form:
Total cost = $1.0417 x Machine hours + $3,500
d.
Total expected electricity cost when 1,200 machine hours are used =
= Variable cost per hour x Activity hour + Fixed cost
= 1.0417 x 1,200+ 3,500
= 1,250+3,500
= $4,750
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