Tristan Wire Company heats copper ingots to very high temperatures by placing th

Question

Tristan Wire Company heats copper ingots to very high temperatures by placing the ingots in a large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingot into wire. Due to the long heat-up time, the coil is never turned off. When an ingot is placed in the coil, the temperature is raised to an even higher level, and then the coil is allowed to drop to the "waiting" temperature between ingots. Management needs to know the variable cost of power involved in heating an ingot and the fixed cost of power during "waiting" periods. The following data on ingots processed and power costs are available: Using the high-low method, estimate a cost formula for power cost. (X represents per ingot.) Express the formula in the form Y = a + bX.

Explanation / Answer

In high low method of seperating fixed and variable cost only two extreme levels of activities like in this question we will consider highest and lowest ingots production and highest and lowest level of power cost which are as follows

Highest Ingots processed 130 and power cost at this level US$ 3750

Lowest ingots processed 40 units and power cost at this level US$ 1500

Varaible cost for 90 units (130 minus 40) is US$ 2250 ($3750 -$1500) is US$ 25 per ignot.

Fixed cost

US$ 3750=Fixed cost +$25*130 ($3250)

Fixed cost =$500

Cost volume formula

y = $500 + 25x

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