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27) Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to...

27) Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows.

Month Machine Hours Worked Utilities Cost

April 4,500 $9,560

May 4,200 $9,440

June 6,500 $10,725

July 7,000 $11,400

Lichtenstein anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time.

The company uses the high-low method to analyze costs.

Required:

A. Calculate the variable and fixed components of the utilities cost.

B. Using the data calculated above, estimate the utilities cost for August.

C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.

Expert Solution

Solution:

The company uses the high-low method to analyze costs.

	Machine hours	Total costs
High activity level - july	7,000	$11,400
Low activity level - may	4,200	$9,440
Differece	2,800	$1,960

Answer (A): The variable and fixed components of the utilities cost:

Variable rate = (change in cost / change in activity)

= $1,960 / 2,800 Nos

= $0.70 per machine hour

Fixed cost = $11,400 - (7,000 Nos * $0.70) (variable costs)

Fixed cost = $6,500

.

Answer (B): The utilities cost for August:

Machine hours - August = 5,000 units * 1.50 hours

= 7,500 hours

Utilities cost - August = $6,500 (fixed cost) + ($0.70 * 7,500 machine hours)

Utilities cost- August = $11,750

Answer (C):

1. Number of data observations used in the analysis:

1. No of data observations used in the analysis:

We just watch two focuses, that is most astounding and the least. Though, Visual fit strategy, uses every one of the information focuses. Visual fit point is more favorable in number of information perceptions.

2. Objectivity of the result:

Visual fit strategy needs add up to objectivity as cost line is fit between the information focuses through visual estimate. The high low point is more worthwhile in objectivity of results.

ekkarill92 answered 1 year ago

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