Gargymal Company would like to estimate the variable and fixed components of its
ID: 2386031 • Letter: G
Question
Gargymal Company would like to estimate the variable and fixed components of its electrical costs and has compiled the following data for the past five months of operations.Machine Hours
Electrical Cost
August
1,000 $1,620
September
900 $1,510
October 1,500 $1,870
November 2,000 $1,950
December 1,300 $1,730
Using the high-low method of analysis, the estimated variable cost per machine hour for electricity is closest to which of the following?
A. $0.98
B. $1.68
C. $2.50
D. $0.40
***Please SHOW HOW to get this answer***
Explanation / Answer
Variable cost = Change in cost Change in activity = ($1,950 - $1,510) (2,000 - 900) = $0.40 Fixed cost element = Total cost - Variable cost element = $1,950 - ($0.40 x 2,000) = $1,150 According to the method if analysis.. The high and the low are November 2,000 and September 900 at $1,950 and $1,510 The Slope is(1950 – 1510)/(2000 – 900) = 440/1100 = 0.40. Total cost = (Variable cost*machine hours + fixed cost) Using the high, it would be: 1950 = 0.40*2000 + fixed cost 1950 = 800 + fixed cost Fixed cost = 1150. SO the answer is C
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