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Company's Energy Cost Behavior

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 applesauce production is relatively uniform throughout the year. The recently hired controller for 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 past 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

Required:
1. Use the high-low method to estimate the company's energy cost behavior and express it in equation form. Use the formula Y = a + bX, where Y denotes energy cost for a month and X denotes pints of applesauce produced.

Total energy cost = $ + $ X

2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.
Energy cost $

Solution Preview

1. Use the high-low method to estimate the company's energy cost behavior and express it in equation form. Use the formula Y = a + bX, where Y denotes energy cost for a month and X denotes pints of applesauce produced.

Total energy cost = $20,000 + $.10X

The high-low method assumes that the fixed component of the cost exists at the lower and ...

Solution Summary

This solution illustrates how to compute fixed and variable overhead using the high-low method and how to use that method to compute overhead at a given activity level.

$2.19