Question

Week 2 Brisbane Indoor Sports, a sporting complex, has opening hours that fluctuate from month to month. The electricity costs and hours of operation for past six months is listed below: Month Total hours of operation Total electricity cost January 650 $ 4,240 February 700 $ 4,400 March 800 $ 4,800 April 600 $ 4,200 May 550 $ 3,700 June 500 $ 3,600 Required: a) Use the high-low method to estimate the cost behaviour for the complex’s electricity costs, assuming that the variable costs vary in proportion to the hours of operation. Express the total cost behaviour in formula form (Y = a + bx). What is the variable electricity cost per hour of operation? b) During July, the complex will open for 570 hours. Predict the complex’s total electricity costs for July using the cost estimation method employed in above requirement a). (3marks) c) What is the main drawba

Answer 1

	High Low Method
	Varablie Cost =	Highest Activity Cost - Lowest Activity Cost
	Highest Activity Hours - Lowest Activity Hours
		=	4800 - 3600
		800-500
		=	$         4.00
	Fixed Cost =	Highest Activity Cost - (Highest Activity Hours X Variable Cost)
		=	4800 - (800 X 4)
		=	$       1,600
	We can say that variable cost upto 500 hours is $ 4.00, 501-550 hours is $ 3.82, 551 - 600 hours is $4.33, 601- 650 hours is $4.06 and from 651- 800 hours is $ 4.
	Complex’s total electricity costs for July, if opened for 570 hours can be :
		=	Fixed Cost + (Variable Cost X Hours Operated)
		=	$(1600 + ( 4.33 X 570))
		=	$ 4,068.10
	Major Drawback is the cost is not uniform as per and should be measured accotrding to unit consumed.
	Working for calculation fixed and variable cost
	Month	Hours Operated	Bill Amount	Amount as per High-Low Method	Variance in Actual	Uint cost Extra / (Low)
	January	650	$       4,240	$           4,200	$                40	$       0.06
	February	700	$       4,400	$           4,400	$                 -
	March	800	$       4,800	$           4,800	$                 -
	April	600	$       4,200	$           4,000	$             200	$       0.33
	May	550	$       3,700	$           3,800	$           (100)	$    (0.18)
	June	500	$       3,600	$           3,600	$                 -