High Low Method
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Jonathan Macintosh is a highly successful Pennsylvania orchardman who has formed his own company to produce and package applesauce. Apples can be stored for several months in cold storage, so apple sauce production is relatively uniform throughout the year. The recently hired controller of the firm is about to apply the high-low method in estimating the company's energy cost behavior. The following costs were incurred during the 12 months:
Month Pints of Applesauce Produced Energy Cost
January 35,000 $23,400
February 21,000 $22,100
March 22,000 $22,000
April 24,000 $22,450
May 30,000 $22,900
June 32,000 $23,350
July 40,000 $28,000
August 30,000 $22,800
September 30,000 $23,000
October 28,000 $22,700
November 41,000 $24,100
December 39,000 $24,950
1. Use the high-low method to estimate the company's energy cost behavior and express it in equation form.
Formula:
Variable cost per = Difference between the costs corresponding to the highest and lowest activity levels
Difference between the highest and lowest activity levels
2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.
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Solution Summary
The solution uses the high-low method to estimate the company's energy cost behavior for pints of applesauce produced.
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Solution
Variable Cost = (28000-22000)/ (41000-21000)
VC = 6000/20000 = $0.30
Then,
Total Fixed ...
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