During the months of April through September, the following total utility costs
ID: 2484728 • Letter: D
Question
During the months of April through September, the following total utility costs were paid at various production volumes: Month Total Utility Costs Total Production Volume April $5,000 16,000 units May 7,000 26,000 units June 8,000 32,000 units July 6,000 20,000 units August 4,000 12,000 units September 10,000 36,000 units a) Use the high-low method to calculate the cost formula utility costs. b) If the production volume were expected to be 22,000 units for the month of November, what amount of total costs would be expected?
Explanation / Answer
Using High-Low method, Unit variable cost
= (Cost at highest output – Cost at lowest output) / (Highest output - Lowest output)
= $(10,000 – 5,000) / (36,000 – 16,000) = $5,000 / 20,000
= $0.25 per unit
Total Cost (C) = Fixed Cost (F) + (V x Q) where V: Unit variable cost, Q: Output
When Q = 16,000:
$5,000 = F + $0.25 x 16,000
$5,000 = F + $4,000
F = $1,000
So,
C = $1,000 + $0.25 x Q
(b) Q = 22,000
C = $1,000 + $0.25 x 22,000 = $(1,000 + 5,500) = $6,500
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