Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows.MonthMachine Hours WorkedUtilities CostApril4,500$9,560May4,200 9,440June6,50010,725July7,00011,400Lichtenstein anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the high-low method to analyze costs.Required: A. Calculate the variable and fixed components of the utilities cost.B. Using the data calculated above, estimate the utilities cost for August.C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.
What will be an ideal response?
A. Variable cost:
($11,400 - $9,440) ÷ (7,000 - 4,200) = $0.70 per hour
| Total cost for 7,000 hours | $11,400 |
| Less: Variable cost (7,000 × $0.70) | 4,900 |
| Fixed cost | $6,500 |
B.
| Variable cost (5,000 × 1.5 × $0.70) | $5,250 |
| Fixed cost | 6,500 |
| Total cost | $11,750 |
C. The high-low method uses only two data observations, the highest and the lowest, whereas the visual-fit method utilizes all data points that have been gathered (except outliers). Many analysts would say the visual-fit method is advantageous in this regard.
However, the visual-fit method lacks total objectivity because of the manner in which the cost line is fit through the data points (drawn by "visual approximation"). The high-low method is therefore said to be more objective.
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