Question

2) Terrell Corporation has the following data relating to its power usage for the first six months of the current year.

Month	Usage	(Kw)Cost
Jan.	500	$450
Feb.	550	455
Mar.	475	395
Apr.	425	310
May	450	380
June	725	484

Assume usage is within the relevant range of activity.

Required:

a.	Using the high-low method, compute the cost formula.
b.	Terrell Corporation estimates its power usage for July at 660 watts. Compute the total power cost for July.

Answer 1

• All working forms part of the answer
• HIGH LOW METHOD Working

	Months	Units	Cost
High Level	June	725	$                         484.00
Low Level	April	425	$                         310.00
Difference		300	$                         174.00

A	Difference in Cost	$                         174.00
B	Difference in units	300
C = A/B	Variable cost per unit	$                             0.58

Working		High Level	Low Level
A	Total Cost	$                       484.00	$                         310.00
B	Total Units	725	425
C	Variable cost per unit	$                           0.58	$                             0.58
D = B x C	Total Variable cost	$                       420.50	$                         246.50
E = A - D	Total Fixed Cost	$                         63.50	$                           63.50

• Requirement ‘a’

Cost Formula: Total Cost = Fixed Cost + (Variable cost per unit x Usage)
= $ 63.50 + ($ 0.58 x Usage)

• Requirement ‘b’

Total power cost to July = $ 63.50 + ($ 0.58 x 660)
= 63.50 + 382.80
= 446.30 = Answer