10-35 High-low method. Wayne Mueller, financial analyst at CELL Corporation, is

Question

10-35 High-low method. Wayne Mueller, financial analyst at CELL Corporation, is examining the behav ior of quarterly utility costs for budgeting purposes. Mueller collects the following data on machine-hours worked and utility costs for the past 8 quarters Utility Costs $215,000 150,000 200,000 270,000 170,000 250,000 225,000 195,000 Quarter Machine-Hours 120,000 75,000 110,000 150,000 90,000 140,000 130,000 100,000 1. Estimate the cost function for the quarterly data using the high-low method 2. Plot and comment on the estimated cost function 3. Mueller anticipates that CELL will operate machines for 125,000 hours in quarter 9. Calculate the pre dicted utility costs in quarter 9 using the cost function estimated in requirement 1

Explanation / Answer

1) Cost Function using High-Low Method is as follows:-

Step 1: At first calculate variable cost per unit.

Variable cost = (Total cost of high activity – Total cost of low activity) / (Highest activity unit – Lowest activity unit) = (270000-150000)/(150000-75000)

Therefore, Variable Cost = $ 1.60 per machine hours (approx)

Step 2: Calculation of fixed cost using Total Cost Formula.

Total Cost = (Variable Cost per machine hours X total machine hours used) + Total Fixed Cost

270000 = (1.60*150000) + Total Fixed Cost

Therefore, Fixed Cost = $30000

Finally Total cost function = 1.60x + 30000 (Ans.)

2)Now putting X = different machine hours operated by the company will get us different total cost for the company.

3) Calculation of predicted utility cost for Quarter 9 if mueller anticipates thta CELL will operate machines for 125000 hours, then utility cost = 1.60x + 30000 = 1.60*125000 + 30000 = $230,000 (Ans.)

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