Question

Fernicus Company gathered the following information on power costs and factory machine usage for the last five months.
Month
Power Cost
Factory Machine Hours
January
P48,000
19,000
February
35,000
15,500
March
50,000
18,500
April
41,000
17,000
May
40,000
15,000
Instructions: Use the high-low method of analyzing costs to answer the following questions.
1. How much is the estimated variable portion of power costs per factory machine hour?
2. How much is the estimated fixed power cost each month?
3. If it is estimated that 18,000 factory machine hours will be run in June, what is the expected total power costs for June?

Answer 1

• All working forms part of the answer
• Working

Month	Machine hours	Cost
Jan	19,000	$       48,000.00
Feb	15,500	$       35,000.00
Mar	18,500	$       50,000.00
Apr	17,000	$       41,000.00
May	15,000	$       40,000.00
5	85,000	$    214,000.00

• High Low Method Working

	Months	Units	Cost
High Level	Jan	19000	$    48,000.00
Low Level	May	15000	$    40,000.00
Difference		4000	$      8,000.00

• Requirement 1

Difference in Cost	$                                     8,000.00
Difference in units	4000
Variable cost per unit	$                                              2.00

Answer: Variable cost = $ 2.00 per factory machine hour

• Requirement 2

Working		High Level	Low Level
A	Total Cost	$      48,000.00	$    40,000.00
B	Total Units	19000	15000
C	Variable cost per unit	$                2.00	$               2.00
D = B x C	Total Variable cost	$      38,000.00	$    30,000.00
E = A - D	Total Fixed Cost	$      10,000.00	$    10,000.00

Answer: Estimated Fixed cost = $ 10,000

• Requirement 3

Expected total cost for June = (18,000 machine hours x $ 2 per machine hours) + $ 10,000

= (18000 x 2) + 10000

= 36000 + 10000

= $ 46,000

Answer = $ 46,000