You have been hired as a consultant for Jones Inc. The company manufactures high-density compact disks and sells them to a wide variety of business clients.
Management is eager to learn more about the company's cost behavior. You have been provided the following data. Assume all production falls within the relevant range.
Month Machine Hours Utility Costs
January 290 $10,700
February 280 10,400
March 320 11,600
April 340 12,100
May 350 12,400
June 290 10,750
July 300 10,800
August 300 10,900
September 310 11,200
October 340 12,200
November 290 10,600
December 310 11,000
1. Using the high-low method, compute the variable and fixed elements of Jones' utility costs.
2. Plot the information on a scattergraph. Based on your graph, determine the unit variable cost and monthly fixed costs.
3. Using the least squares method (either the equation approach or a software package), calculate the variable and fixed cost components. Determine the cost formula.
4. Interpretive Question: Why are the variable cost per unit and fixed costs different for each of these methods of analysis? Which method is the most accurate for determining variable and fixed cost components?
a. High-Low Method:
High level Low level Change
Machine Hours 350 280 70
Cost 12400 10400 2000
Variable cost = Change in cost / Change in Machine hours = 2000/70 = 28.5714
Total cost at high level = 12400
Total variable cost = Machine hours * variable cost = 350*28.5714 = 9999.99
Fixed Cost = Total cost at high level - Total variable cost
= 12400 - 9999.99 = 2400.01
b. Scatter Plot:
The fixed cost is at 10000. The variable cost for each level of ...
High-Low Method, Scatterplot, and Least-Squares Methods are investigated.