Davies Company\'s Utility Cost at various levels of activity are shown below: Mo

Question

Davies Company's Utility Cost at various levels of activity are shown below:

Month           Units        Utility Cost

April              70,000      $198,000

May               60,000      $174,000

June               80,000      $222,000

July                 90,000      $246,000

Requirement 1: Given the above information, use the High-Low method to compute the variable and fixed portion of utility cost. Show your computations and indicate the cost equation. (5 points)

Requirement 2: Using the equation from requirement 2, compute total cost estimate if 75,000 units are produced. Show your computations. (5 points)

Explanation / Answer

Variable cost=[Total cost at highest level-Total cost at lowest level]/(Highest level-Lowest level)

=(246000-174000)/(90000-60000)

=$2.4 per unit

Total fixed cost=246000-(2.4*90000)=$30000

Cost equation:

y=30000+2.4x

where y=Total cost

x=number of units

Hence total cost for 75000 units=30000+(2.4*75000)=$210,000

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