Question

Pharoah, Inc., has collected the following information on its cost of electricity:

Machine Hours Total Electricity Costs
January 510 $240
February 540 $300
March 360 $200
April 440 $210
May 660 $290
June 720 $350
July 320 $170
August 500 $270
September 220 $122
October 730 $340
November 840 $370
December 600 $310

Required:
a. Using the high-low method, compute the variable cost of electricity per machine hour.
b. Compute the total fixed cost of electricity.
c. Represent the electricity cost function in equation form.
d. What is the expected electricity cost when 750 machine hours are used?

Answer 1

Results are below.

Step-by-step explanation:

To calculate the variable and fixed cost, we need to use the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (370 - 122) / (840 - 220)

Variable cost per unit= $0.4

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 370 - (0.4*840)

Fixed costs= $34

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 122 - (0.4*220)

Fixed costs= $34

Total cost= 34 + 0.4x

x= machine hour

Now, the number of hours is 750:

Total cost= 34 + 0.4*750

Total cost= $334