Question

Davies Company's Utility Cost at various levels of activity are shown below: Month Units Utility Cost April 5,000 $7,400 May 7,300 $9,100 June 8,000 $9,800 July 6,500 $8,200 Requirement 1: Given the above information, use the High-Low method to compute the variable and fixed portion of utility cost. Show your computations and indicate the cost equation. (5 points) Requirement 2: Using the equation from requirement 2, compute total cost estimate if 6,000 units are produced. Show your computations. (5 points)

Answer 1

Solution:

From the given data we need to find total cost of 6,000 units: Calculations are follows,

Variable cost :

=(Total cost at highest level - Total cost at lowest level) / (Highest level-Lowest level)

=($9,800- $7,400) / (8,000 - 5,000)

= $2,400 / 3,000

= $0.8 per unit

Variable cost :

= (8,000*$0.8)

Variable cost = $6,400

Fixed cost : (Total cost - variable cost)

= $9,800 - ($0.8 * 8,000)

= $9,800 - $6,400

= $3,400

Cost equation: y=$3,400 + 0.8x

where,

y = Total cost

x = number of units

Hence total cost for 6,000  units :

= $3,400 + ($0.8 * 6,000)

= $3,400 + $4,800

= $8,200

Total cost for 6,000  units

$8,200