. Paine Company wishes to determine the fixed portion of its electrical costs (a

Question

. Paine Company wishes to determine the fixed portion of its electrical costs (a mixed cost). Management believes that the variable portion of the electrical costs is driven by machine-hours. Information for the previous three months follows:

Machine-hours    Electrical cost

January            66,000                $7,150

February          62,000                $7,000

March              68,000                $7,600

Company is expecting 64,200 machine hours for month of April. What is expected company's electrical cost for April? (Hint: Using the high-low method, first determine the relationship between electrical cost and machine hours. Then using the relationship compute expected company's electrical costs for month of April.)

Explanation / Answer

Variable cost per unit=[Total cost at highest level-Total cost at lowest level]/(Highest level-Lowest level)

=(7600-7000)/(68000-62000)=$0.1 per machine hour

Total fixed cost=7600-(0.1*68000)=$800

Hence total cost for 64200 machine hours=Variable cost+Fixed cost

=(0.1*64200)+800

=$7220.

NOTE:Total fixed cost and variable cost per unit do not change with change in units.

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