The Fairmont Machine Shop wants to develop a cost estimating equation for its mo
ID: 2498948 • Letter: T
Question
The Fairmont Machine Shop wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data:
Month
Cost of Electricity (Y)
Direct Labor-Hours (X)
January
$14,000
1,500
April
$15,000
1,700
July
$17,000
2,000
October
$14,500
1,600
What would be the best equation using the high-low method?
Y = $4,000 + $7X
Y = $0 + $9X
Y = $1,000 + $8X
Y = $5,000 + $6X
Month
Cost of Electricity (Y)
Direct Labor-Hours (X)
January
$14,000
1,500
April
$15,000
1,700
July
$17,000
2,000
October
$14,500
1,600
Explanation / Answer
We have,
at highest activity: x2 = 2,000; y2 = $17,000
at lowest activity: x1 = 1,500; y1 = $14,000
Variable Cost per Unit = ($17,000 $14,000) ÷ (2,000 1,500) = $6 per unit
Total Fixed Cost = $17,000 ($6 × 2,000) = $14,000 ($6 × 1,500) = $5,000
Cost Volume Formula: y = $5,000 + $6x
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