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Title Subtitle Subtle lu-ats x,x\'a-y.A-1 :-a- Norma] 1NoSpac\" Heading 1 Headirg 2 3-A2 Division of Mixed Costs into Variable and Fixed Components Molly Flutie, president of First Tool, Co., has asked for information about the cost behavior of manufacturing support costs. Specifically, she wants to know how much support cost is fixed and how much is variable. The following data are the only records available: Month Machine Hours Support Costs May June 1,700 1,600 1,500 1,400 1,300 $ 22,000 21,000 19,500 18,500 18,000 August September 1. Find monthly fixed support cost and the variable support cost per machine hour by the high-low 2. Explain how your analysis for requirement 1 would change if new October data were received and machine hours were 1,650 and support costs were $24,000 3. A least-squares regression analysis gave the following output Regression equation: Y $4,050 $10.50 X What recommendations would you give the president based on these analyses?

Solution

3-A2) 1. Analysing the fixed and variable costs as per high-low method: MHs Sup Costs High 1700 22000 Low 1300 18000 difference 400 4000 Variable cost = 4000/400 = 10 Fixed cost = 18000 - (1300 * 10) = 5000 Equation becomes: Support Costs (Y) = $5000 + $10 * MHs (ie. X) 2. With the inclusion of October data with MHs 1650 & Sup costs $24000 MHs Sup Costs High 1650 24000 Low 1300 18000 difference 350 6000 Variable cost = 6000/350 = 17.14 Fixed cost = 18000 - (1300 * 17.14) = 4282 Equation becomes: Y = $4282 + $17.14 * X 3. As per least squares regression analysis, the equation is Y = $4050 + $10.50 * X Recommendation: the least squares regression analysis equation and bifercation of the fixed and variable costs should be accepted. This is because more defined variation costs and least defined fixed costs is more apt.