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