Question

This cost data from Hickory Furniture is for the year 2017.
	Month		Invoices Processed		Overtime Wages
	January		12000		$7,760
	February		8000		$6,800
	March		1000		$6,000
	April		7000		$6,100
	May		5000		$6,200
	June		10000		$7,300
	July		11000		$7,400
	August		9000		$6,900
	September		5000		$6,500
	October		9000		$6,600
	November		8000		$6,800
	December		11000		$7,450
A. Using the high-low method, express the factory utility expenses as an equation where x represents number of chairs produced.
B. Predict the utility costs if 900 chairs are produced.
C. Predict the utility costs if 750 chairs are produced.
D. Using Excel, create a scatter graph of the cost data and explain the relationship between number of chairs processed and utility expenses.

Answer 1

Requirement A:

 

	Invoices Processed (activity)	Overtime Wages (cost)
High activity level	12,000	$7,760
Low activity level	1,000	6,000
Change in activity and cost	11,000	1,760

 

Variable cost = Change in cost ÷ Change in activity

                      = ($7,760 -6,000) ÷">÷÷ (12,000 -1,000)

                       = $1,760 / 11,000 = $0.16

Variable cost per invoice processed = $0.16

Fixed cost =  Total cost at 1,000 level - Variable costs at 1,000 level

                    = 6,000 - 1,000 x 0.16

                    = 6,000 -160

                    = $5,840

 

Cost Equation:

Total costs (y) = $5,840 + $0.16X

Where, X represents number of invoices/chairs

 

Requirement B

 

Predict the utility costs if 900 chairs are produced

Total cost (Y) = $5,840 + ( 900 x 0.16 )

                        =  5,840 + 144

                         = $5,984

Utility costs = 5,984

 

Requirement C

Predict the utility costs if 750 chairs are produced

Total cost (Y) = $5,840 + ( 750 x 0.16 )

                        =  5,840 + 120

                         = $5,960

Utility costs = $5,960

Variable cost per unit =  (Total costs at highest activity - Total costs at lowest activity) ÷ (Highest activity - Lowest activity)