De rowesr asco\"pared to -1 6) Lichtenstein Imports needs to determine the varia

Question

De rowesr asco"pared to -1 6) Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows. Month Machine Hours Utilities Cost April May une July Worked 4,500 4,200 6,500 7,000 $9,560 9,440 10,725 11,400 Lichtenstein anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the high-low method to analyze costs. Required: A. Calculate the variable and fixed components of the utilities cost. B. Using the data calculated above, estimate the utilities cost for August. C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.

Explanation / Answer

Answer A. Using the High Low Method: Machine Hours   Total Costs High Activity Level - July                                    7,000                         11,400.00 Low Activity level - May                                    4,200                            9,440.00 Difference                                    2,800                            1,960.00 Variable Rate = Change in Cost / Change in Activity Variable Rate = $1,960 / 2,800 nos Variable Rate = $0.70 per mach hr Fixed Cost = $11,400 - (7,000 Nos X $0.70) (Variable Costs) Fixed Cost = $6,500 Answer B. Machine Hours - Aug. = 5,000 Units X 1.50 hrs = 7,500 hrs Utilities Cost - August = $6,500 (Fixed Cost) + ($0.70 X 7,500 mach hrs) Utilities Cost - August = $11,750 Answer C. 1. No. of Data Observations - In High-Low Method, we only observe two points, i.e highest and the lowest. Whereas, Visual-fit method, utilizes all the data points. Visual fit point is more advantegous in number of data observations. 2. Objectivity of Result - Visual-fit method lacks total objectivity as cost line is fit between the data points through visual approximation. The high low point is more advantegous in objectivity of results

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