Activity-Analysis, Cost Behavior, and Cost Estimation:

Activity-Analysis, Cost Behavior, and Cost Estimation:

Exercise 6-25 Page 259:

1. Use the high-low method to estimate the company’s energy cost behavior and express it in equation form.

The High-low Method:

Variable Cost/Pint = (Energy cost @ High level – Energy Cost/Pint @ Low Level)

(High Level – Low Level)

= (24,100 – 22,100)

(41,000 – 21,000)

= $2,000 ÷ 20,000 Pints Produced = $0.10/Pint

 

Total Cost @ 41,000 Pints = $24,000

Less Variable Cost @ 41,000 Pints (41,000 x $0.10) = $4,100

Fixed Cost = $20,000

Let:

Y represent Total Energy Cost

X represent Number of pints produced

Y = 0.10X + $20,000

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