Question

Machine hours and electricity costs for AMK Industries for the past eleven months were as follows:...

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.

Homework Answers

Answer #1

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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