Question

Martha’s Vineyard Marine Supply is a wholesaler for a large variety of boating and fishing equipment. The company’s controller, Mathew Knight, has recently completed a cost study of the firm’s material-handling department in which he used work measurement to quantify the department’s activity. The control factor unit used in the work-measurement study was hundreds of pounds of equipment unloaded or loaded at the company’s loading dock. Knight compiled the following data.

Units of Activity Month (hundreds of pounds of
equipment loaded or unloaded) Material-Handling
Department Costs
January 1,400 $ 11,350 February 1,200 11,350 March 1,100 11,050 April 2,600 12,120 May 1,800 11,400 June 2,000 12,000 July 2,400 12,550 August 2,200 11,100 September 1,000 10,200 October 1,300 11,250 November 1,600 11,300 December 1,800 11,700 Required:
5. Estimate the material-handling department’s cost behavior using the high-low method. Use an equation to express the results of this estimation method. (Round coefficient of X to 2 decimal places.)

Answer 1

The high-low method is used to estimate the cost behavior of the material-handling department. By determining the highest and lowest units of activity and their corresponding costs, a fixed cost and variable cost per unit of activity can be calculated. The equation to express the cost behavior is Cost = $9,000 + $1.20 * Units of activity.

Step-by-step explanation:

To estimate the material-handling department's cost behavior using the high-low method, we need to find the highest and lowest units of activity and the corresponding costs. In this case, the highest units of activity are 2,600 (April) with a cost of $12,120 and the lowest units of activity are 1,000 (September) with a cost of $10,200. The change in cost is $12,120 - $10,200 = $1,920 and the change in units of activity is 2,600 - 1,000 = 1,600.

The variable cost per unit of activity (X) can be calculated as the change in cost divided by the change in units of activity: $1,920 / 1,600 = $1.20. So the equation to express the material-handling department's cost behavior is:

Cost = Fixed cost + Variable cost * Units of activity

Using the highest units of activity and the corresponding cost, we can substitute the values into the equation to solve for the fixed cost:

$12,120 = Fixed cost + ($1.20 * 2,600)

Fixed cost = $12,120 - ($1.20 * 2,600) = $12,120 - $3,120 = $9,000.

Therefore, the equation to express the material-handling department's cost behavior using the high-low method is:

Cost = $9,000 + $1.20 * Units of activity

Answer 2

To estimate the material-handling department's cost behavior using the high-low method, we need to identify the highest and lowest levels of activity and their corresponding costs. Using these data points, we can calculate the variable cost per unit of activity and the fixed cost. The estimated cost behavior equation is total cost = $7,416 + ($1.96 * Activity level in hundreds of pounds).

Step-by-step explanation:

To estimate the material-handling department's cost behavior using the high-low method, we need to identify the highest and lowest levels of activity and their corresponding costs. From the given data, the highest activity level is 2,600 hundreds of pounds of equipment loaded or unloaded in April, with a cost of $12,120. The lowest activity level is 1,000 hundreds of pounds of equipment loaded or unloaded in September, with a cost of $10,200.

Using the high-low method, we can calculate the variable cost per unit of activity:

Variable cost per unit of activity = (Highest cost - Lowest cost) / (Highest activity level - Lowest activity level)
Variable cost per unit of activity = ($12,120 - $10,200) / (2,600 - 1,000) = $1.96

Next, we can calculate the fixed cost by using either the highest or lowest data point:

Fixed cost = Total cost - (Variable cost per unit of activity * Total activity level)

Taking the highest data point (2,600 hundreds of pounds of equipment loaded or unloaded in April),

Fixed cost = $12,120 - ($1.96 * 2,600) = $7,416

The estimated cost behavior equation is:

Total cost = $7,416 + ($1.96 * Activity level in hundreds of pounds)