Question

Blue Company's activity for the first six months of the current year is as follows: (20 points) Machine Hours Electrical Cost January 2,000 $3,000 February 3,500 5,500 March 2,400 4,000 April 1,600 2,400 May 1,500 2,500 June 2,100 3,500

INSTRUCTIONS:

a) Using the high-low method, what is the variable cost per machine hour?

b) Using the high-low method, what is the fixed portion of the electrical cost each month?

c) What would be the expected total electrical costs if the month of July was anticipated to use 3,000 machine hours?

d) What would be the expected total electrical costs if the month of August was anticipated to use 6,000 machine hours? Briefly explain your answer.

Answer 1

Month	Machine Hour	Cost
Jan	2000	3000
Feb	3500	5500
Mar	2400	4000
Apr	1600	2400
May	1500	2500
Jun	2100	3500

Highest Activity Cost       = 5500

Lowest Activity Cost        = 2500

Highest Activity Units     = 3500

Lowest    Activity Units = 1500

a)Variable Cost per Unit = (Highest Activity Cost – Lowest Activity Cost)/ (Highest Activity Units – Lowest    Activity Units)

Variable Cost per Unit    = (5500-2500)/(3500-1500)

                                                = 1.50 per unit

b)Fixed Cost: =   Highest Activity Cost – (Variable Cost Per Units x Highest Activity Units)

                     = 5500=(1.50*3500)

                     =5500-5250 =250

c) Total Cost = Fixed cost + Variable cost x Unit activity

Total Cost for July =250+(3000*1.50) =4750

d)Total cost for August =250+(6000*1.5) =9250