Justin Manufacturing Company wants to develop a cost estimating equation for its month cost of electricity

Accounting Nov 28, 2020

Justin Manufacturing Company wants to develop a cost estimating equation for its month cost of electricity. It has the following data.
Month Electricity costs DL Hours January P13,500 3,000 February 15,000 3,400 March 17,000 4,000 April 14,500 3,200 Let a = FC B = VC X = DLH Y = TC

2) Using the high-low method, the best equation is a. TC = P3,000 + P5000X b. TC = P3,000 + P3.50X c. TC = P1,500 + P5.00X d. TC = P1,500 + P3.50X

Expert Solution

Variable cost per unit (High low method = (Cost at highest activity - Cost at lowest activity) / (Highest activity-Lowest activity)

= ($17,000 - $13,500)/(4,000 - 3,000)

= $3,500/1,000

= $3.5 per unit

As we know,

Total Cost = Variable Cost + Fixed Cost

$17,000 = (3.5*4,000) + Fixed cost

$17,000 = $14,000 + Fixed Cost

Fixed cost = $17,000 - $14,000 = $3,000

The equation would be Y = $3,000 + 3.5X

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