Thul Company is interested in establishing the relationship between electricity costs and machine hours.Data have been collected and a regression analysis prepared using Excel.The monthly data and the regression output follow: If the controller uses the high-low method to estimate costs,the cost equation for electricity cost is:
A)Cost = $3,726.88 + $5.77 × Machine-hours.
B)Cost = $1,625.00 + $6.25 × Machine-hours.
C)Cost = $6.90 × Machine-hours.
D)Cost = $22,825.

Question

Thul Company is interested in establishing the relationship between electricity costs and machine hours.Data have been collected and a regression analysis prepared using Excel.The monthly data and the regression output follow:  If the controller uses the high-low method to estimate costs,the cost equation for electricity cost is:
A)Cost = $3,726.88 + $5.77 × Machine-hours. 
B)Cost = $1,625.00 + $6.25 × Machine-hours. 
C)Cost = $6.90 × Machine-hours. 
D)Cost = $22,825.

Quizplus · Accepted Answer

The high-low method involves using the highest and lowest activity levels and costs to estimate the variable cost per unit of activity. In this case, the highest level of machine hours is 5,000 and the lowest is 2,000, with corresponding costs of $38,000 and $16,500, respectively. 
Using these values, we can calculate the variable cost per machine hour:

Variable cost per machine hour = (Highest cost - Lowest cost) / (Highest activity - Lowest activity)
Variable cost per machine hour = ($38,000 - $16,500) / (5,000 - 2,000)
Variable cost per machine hour = $6.25

Therefore, the cost equation for electricity cost is:

Cost = $1,625.00 + $6.25 × Machine-hours.

Thul Company Is Interested in Establishing the Relationship Between Electricity