2. Westminster Company has had the following experience over the past five quart

Question

2. Westminster Company has had the following experience over the past five quarters:

Units produced                        Electricity cost ($)
27,000                                            101,000
32,000                                            120,000
31,000                                            116,000
20,000                                              84,000
22,000                                              90,000

a) Using the high-low method, determine an equation for electricity cost (Y) as a function of units produced (X). Assume a linear function.

b) Using your equation, forecast electricity cost at a volume of 30,000 units produced.

Explanation / Answer

a) Using the high-low method, determine an equation for electricity cost (Y) as a function of units produced (X). Assume a linear function. High 32,000 120,000 Low 20,000 84,000 Difference 12,000 36,000 Per unit increase = 36,000 ÷12,000 =$3 Fixed cost can be calculated as below: 20,000 units 32,000 units Total cost = 84,000 120,000 Variable cost 60,000 96,000 Fixed cost 24,000 24,000 Equation for total cost = (Number of units x Variable cost) + Fixed cost b) Using your equation, forecast electricity cost at a volume of 30,000 units produced Equation for total cost = (Number of units x Variable cost) + Fixed cost = (30,000 x 3) + 24,000 =$114,000

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