Vargis Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting records revealed the following selected costs:?At a 40% Utilization RateAt a 90% Utilization RateCost A:?? Total$440,000$440,000 Per hour$5.50?Cost B:?? Total?$1,944,000 Per hour$10.80$10.80Cost C:?? Total$680,000$1,330,000 Per hour$8.50$7.39Vargis uses the high-low method to analyze cost behavior.Required: A. Classify each of the costs as being either variable, fixed, or semivariable.B. Calculate amounts for the two unknowns in the preceding table.C. Calculate the total amount that Vargis would expect at a 75% utilization rate for Cost A, Cost B, and Cost
C.D. Develop an equation that Vargis can use to predict total cost for any level of hours within its range of operation.
What will be an ideal response?
| A. | Cost A: Fixed (same total amount at each level of activity) |
Cost C: Semivariable (changing total and per-hour figures)
| B. | Cost A: $440,000 ÷ (200,000 hours × 90%) = $2.44 |
| C. | Analysis of Cost C (variable portion): |
| Analysis of Cost C (fixed portion): | ? |
| Total cost at 40% utilization | $680,000 |
| Variable cost (200,000 × 40% x $6.50) | 520,000 |
| Fixed cost | $160,000 |
| ? | ? |
| 75% utilization: 200,000 × 75% = 150,000 hours | ? |
| ? | ? |
| Cost A | $440,000 |
| Cost B (150,000 × $10.80) | 1,620,000 |
| Cost C: | ? |
| Variable portion (150,000 × $6.50) | 975,000 |
| Fixed portion | 160,000 |
| Total cost | $3,195,000 |
| D. | Variable cost per hour: $10.80 + $6.50 = $17.30 |
Equation: Y = $600,000 + $17.30X
where Y = total cost and X = number of hours
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