Information about Indiana Industrial\'s utility cost for the last six months of
ID: 2434508 • Letter: I
Question
Information about Indiana Industrial's utility cost for the last six months of 2010 follows. The high-low method will be used to develop a cost formula to predict 2011 utility charges, and the number of machine hours has been found to be an appropriate cost driver. Dat for the first half of 2010 are not being considered because the utility company imposed a significant rate change a of July 1, 2010.Month Machine Hours Utility Cost
July 33,750 $13,000
August 34,000 12,200
September 33,150 11,040
October 32,000 11,960
November 31,250 11,500
December 31,000 11,720
a. What is the cost formula for utility expense?
b. What is the budgeted utility cost for September 2011 if 31,250 machine hours are projected?
Explanation / Answer
Utility expense = (Y2 - Y1) / (X2-X1) Y2 = Cost at the high level of activity Y1 = Cost at the low activity X2 = High level activity X1 = Low level activity High-activity level (August) 34,000 $12,200 Low-activity level (December) 31,000 $11,720 Utility expense = $480 / 3,000 = $0.16 per hour Therefore, the fixed cost element = Total cost - Variable cost = $12,200 - ($0.16 * 34,000) = $6,760 The utility cost can now be expressed as $6,760 plus $0.16 per hour. b) If the machine hours for september are 31,250 The budgeted utility cost is $11,500