Question

Month Maintenance Machine Health Number of Shipping Units

costs Hours Insurance Employees Costs Shipped
January 4500 165 8600 68 25778 7160
February 4452 120 8600 75 29664 8240
March 4600 230 8600 92 28674 7965
April 4850 318 8600 105 23058 8405
May 5166 460 8600 89 21294 5915
June 4760 280 8600 87 33282 9245
July 4910 340 8600 93 31428 8730
August 4960 360 8600 88 30924 8415
September 5070 420 8600 95 25110 6975
October 5250 495 8600 102 25866 7185
November 5271 510 8600 97 20124 5590
December 4760 275 8600 94 34596 9610
1. Which of the preceding costs is variable? Fixed? Mixed? Explain.
2. Using the high-low method, determine the cost function for each cost.
3. 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. Estimate total operating cost for month.

Answer 1

1. Variable cost = Shipping costs

Fixed cost = Health Insurance

Mixed cost = Maintenance costs

Shipping costs are variable because a unit shipped costs $3.60. The total shipping cost for each month varies according to the units shipped in the month.

Health Insurance costs are fixed as there is no change in cost notwithstanding the number of employees in each month. The total health insurance cost remains the same every month.

Maintenance costs are mixed for each month, as there is a fixed element and a variable element.

2. Cost function for each cost:

Maintenance = $4,200 + $2.10 per machine hour

Health Insurance = $8,600

Shipping cost = $3.60 per unit

3. Cost function = $12,800 + $2.1m + $3.6s

where m = machine hours

and s = units shipped

4. The total operating cost for the month

= $46,040

Step-by-step explanation:

a) Data and Calculations:

Month Maintenance Machine Health Number of Shipping Units

costs Hours Insurance Employees Costs Shipped

January 4500 165 8600 68 25778 7160

February 4452 120 8600 75 29664 8240

March 4600 230 8600 92 28674 7965

April 4850 318 8600 105 23058 8405

May 5166 460 8600 89 21294 5915

June 4760 280 8600 87 33282 9245

July 4910 340 8600 93 31428 8730

August 4960 360 8600 88 30924 8415

September 5070 420 8600 95 25110 6975

October 5250 495 8600 102 25866 7185

November 5271 510 8600 97 20124 5590

December 4760 275 8600 94 34596 9610

Cost Function for each cost:

Maintenance cost:

Machine Cost

Hours

November 510 5271

February 120 4452

Difference 390 819

Variable cost = $2.10 (819/390)

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

Health Insurance:

Fixed cost = $8,600

Shipping cost:

Variable cost = $3.60 per unit

Cost function = $4,200 + $2.10m + $8,600 + $3.60s

= $12,800 + $2.1m + $3.6s

February cost = $12,800 + $2.1(120) + $3.6(8240)

= $12,800 + $252 + $29,664

= $42,716

IF:

Machine hours = 400

Employees = 80

Shipped units = 9,000

The total operating cost for the month will be:

Cost function = $12,800 + $2.1m + $3.6s

= $12,800 + ($2.1 * 400) + ($3.6 * 9,000)

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

= $46,040