Question

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.

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