Question

The controller of Blossom Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs.

		Total Electricity Costs				Total Machine Hours
January			$2,660				230
February			3,050				330
March			3,520				460
April			4,770				690
May			3,190				420
June			4,960				790
July			4,030				650
August			3,870				590
September			5,040				670
October			4,270				610
November			3,260				330
December			8,460				810

(a)

Determine the fixed- and variable-cost components using the high-low method.

Fixed-costs		$
Variable-costs		$

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(b)

What electricity cost does the cost equation estimate for a level of activity of 460 machine hours?

Electricity costs

$

By what amount does this differ from March’s observed cost for 460 machine hours?

Amount differ

$

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(c)

What electricity cost does the cost equation estimate for a level of activity of 790 machine hours?

Electricity costs

$

By what amount does this differ from June’s observed cost for 790 machine hours?

Amount differ

$

Answer 1

Answer -

(a) Answer -

Fixed costs = $360

Variable costs = $10 per machine hour

Calculation:

As per given information,

Highest activity cost = $8,460

Lowest activity cost = $2,660

Highest activity = 810 machine hours

Lowest activity = 230 machine hours

So,

Variable cost = (Highest activity cost - Lowest activity cost) / (Highest activity - Lowest activity)

= ($8,460 - $2,660) / (810 machine hours - 230 machine hours)

= $5,800 / 580 machine hours

= $10 per machine hour

Now,

Fixed cost = Highest activity cost - (Variable cost per machine hour * Highest activity)

= $8,460 - ($10 per machine hour * 810 machine hours)

= $360

(b) Answer -

Electricity costs = $4,960

Amount differ = $1,440

Calculation:

As per given information,

Observed electricity cost for level of activity of 460 machine hours is $3,520 (total electricity cost for March).

Now,

Electricity costs = Fixed costs + (Variable cost per machine hour * Level of activity)

= $360 + ($10 per machine hour * 460 machine hours)

= $4,960

Amount differ = Electricity costs - Observed electricity cost for level of activity of 460 machine hours

= $4,960 - $3,520

= $1,440

(c) Answer -

Electricity costs = $8,260

Amount differ = $3,300

Calculation:

As per given information,

Observed electricity cost for level of activity of 790 machine hours is $4,960 (total electricity cost for June).

Now,

Electricity costs = Fixed costs + (Variable cost per machine hour * Level of activity)

= $360 + ($10 per machine hour * 790 machine hours)

= $8,260

Amount differ = Electricity costs - Observed electricity cost for level of activity of 790 machine hours

= $8,260 - $4,960

= $3,300