Exercise 29 Stratton Inc has collected the following informa

Exercise 2-9 Stratton, Inc., has collected the following information on its cost of electricity: January February March April May June July August September October November December Machine Hours 510 540 360 450 660 690 340 520 240 750 840 600 Total Electricity Costs $240 $300 $205 $215 $290 $300 $180 $260 $120 $340 $360 $320 Using the high-low method, compute the variable cost of electricity per machine hour. (Round unit cost to 2 decimal places, e.g. 52.75.) Variable cost $ per machine hour

Solution

Answer

1.

High-Low Method

As we can see that in September month the hours consumed is least and In November Month the hours consumed is highest.

Hours

Electricity Cost

September

240

120

November

840

360

Difference

600

240

Variable cost = (High Cost – Low Cost) / (High hours – Low Hours)

= (360 - 120) / (840 - 240)

Variable cost = $0.4 per Hour

2.

Fixed Cost = Total Cost – Variable cost

Lets take November month, Total Cost = $360, Hours = 840

Fixed Cost = $360 – (840 hours * $0.4 per our)

Fixed Cost = $24

3.

Total Cost = ($0.4 * MH) + $24

4.

Expected Cost = ($0.4 * MH) + $24

= ($0.4 * 750 hours) + $24

Expected Cost for 750 Machine hours= $324

	Hours	Electricity Cost
September	240	120
November	840	360
Difference	600	240