Question

A company’s electricity cost is a mixed cost - partly fixed and partly variable. If during the month with the largest electricity use the company used 15,000 machine hours and had an electricity cost of $36,000 and during the month with the smallest electricity use the company used 7,000 machine hours and had an electricity cost of $20,000.

1. Its variable cost per machine hour (as determined by the high-low method) would be ____________

2. Its fixed cost per month (as determined by the high-low method using the high numbers) would be _____________________

3. Its fixed cost per month (as determined by the high-low method using the low numbers) would be _____________________

4. Write the equation for estimating the monthly electricity cost.

5. What would you estimate would be the electricity cost for a month when 9,000 machine hours were used?

Answer 1

1) Variable cost per machine hour = Change in cost/change in machine hour2

                                                       = (36000-20000)/(15000-7000)

Variable cost per machine hour = 2 per machine hour

2) Fixed as per high numbers = total cost-variable cost

                                                = 36000-(15000*2)

Fixed cost as per high numbers = 6000

3) Fixed cost per low number = total cost-variable cost

                                                 = 20000-(7000*2)

Fixed cost per low number = 6000

4) Y = a+bx

Y = 6000+2X

5) Total cost on 9000 machine hour = 6000+(9000*2) = 24000