Maintenance Machine Health Number of Shipping Units Hours Insurance Employees C

Question

Maintenance Machine Health Number of Shipping Units Hours Insurance Employees C Costs Shipped Month January February March April May June Costs $4,500 $4,452 $4,600 $4,850 $5,166 $4,760 $4,910 $4,960 $5,070 $5,250 $8,600 $8,600 $8,600 $8,600 $8,600 $8,600 $8,600 $8,600 $8,600 $8,600 $8,600 $8,600 68 75 92 105 89 87 93 $25,776 7,160 $29,664 8240 $28,674 7,965 $23,058 6,405 $21,294 5,915 $33,282 9,245 $31,428 8,730 $30,294 8,415 $25,110 6,975 $25,866 7,185 $20,124 5,590 165 230 318 460 280 340 360 420 495 510 275 August September October November December 95 102 97 94 $4,760 34,596 9,610 1. Which of the preceding costs is variable? Fixed? Mixed? Explain. 2. Using the high-low method, determine the cost function for each cost. Combine the preceding information to get a monthly operating cost function for the Stein Corporaton. the total operating cost for the month 4. Next month, Stein expects to use 400 machine hours, have 80 employees, and ship 9,000 units. Estim

Explanation / Answer

1) Fixed cost remains constant and does not increase or decrease with increase or decrease in volume of output. Variable cost varied with each unit of output and remains same on per unit basis. Mixed cost is mix of both fixed cost and variable cost.

In the given case, Health insurance cost is fixed at $8,600 in each month hence it is a fixed cost. The shipping cost is variable cost because it is same at $3.60 per unit shipped in each month (i.e. $25,776/7,160 units = $3.60 per unit). Maintenance cost is mixed cost because it is neither constant over the period nor it is same per unit for each month.

2) Firstly We need to seperate the mixed maintenance cost into variable and fixed component using high low method which is shown as follows:-

The highest machine hours is 510 hours in the month of november at $5,271 cost and the lowest machine hours is 120 hours in february at $4,452.

Variable maintenance cost per hr = ($5,271 - $4,452)/(510 hrs - 120 hrs)

= $819/390 hrs = $2.10 per hour

Fixed Maintenance cost = $5,271 - (510 hrs*$2.10) = $4,200

Cost Function for maintenance cost = ($2.10*machine hours)+$4,200

Let denote machine hour with M

Cost function for maintenance cost = $2.10M+$4,200

Cost Function for Health Insurance cost = $8,600

Cost function for Shipping cost = $3.60*Units shipped

Let denote units shipped with S.

Cost function for Shipping cost = $3.60*S

3) Monthly Operating cost function = $2.10M+$4,200+$8,600+$3.60S

= $2.10M+$3.60S+$12,800

4) Total operating cost for next month = ($2.10*400 machine hrs)+($3.60*9,000 units shipped)+$12,800

= $840+$32,400+$12,800 = $46,040

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