Answer:
Y = 1,089,000 + 6.30X
Explanation:
To get the answer, we use high and low cost estimation method. The method is used to separate fixed and variable costs. The formula for the high and low method is as follows:
VC = (HAC − LAC
) ÷ (HAU − LAU)
Where:
HAU = High Activity Units = 165,000
HAC = High Activity Cost = 165,000 × 12.9 = 2,128,500.00 cents
LAU = Low Activity Units = 110,000
LAC = Lowe Activity Cost = 110,000 × 16.2 = 1,782,000.00 cents
VC = Variable cost is per unit
Substituting the values into equation 1, we have:
VC = (2,128,500.00 − 1,782,000.00) ÷ (165,000 − 110,000)
= 346,500.00 ÷ 55,000
VC = 6.30 cents per unit
To calculate the fixed cost, we use the equation:
Y = a + b.X
Where
Y = Total Cost
a = Fixed Cost
b = VC = 6.3 cents
X = Units Produced
We can use either of the high or low figures to calculate the fixed cost. That is, either of the high or low figures will give us the same answer. If we use the high cost and the high activity, then:
Y = Total Cost = 2,128,500.00
X = 165,000
Therefore,
Y = a + b.X becomes:
2,128,500.00 = a + (6.30 × 165,000)
2,128,500.00 = a + 1,039,500.00
Making "a" the subject of the formula, we have
a = 2,128,500.00 - 1,039,500.00
= 1,089,000.00
Since b = 6.30 and a = 1,089,000.00, we can now express the variable and fixed costs in the following form:
Y = 1,089,000 + 6.30X
