Question

Thane 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:
  

Month	Machine Hours	Electricity Costs
January	2,900	$	18,600
February	3,300	$	21,400
March	2,300	$	13,700
April	3,500	$	23,400
May	4,200	$	28,450
June	3,700	$	22,400
July	4,500	$	24,950
August	3,900	$	22,950
September	2,400	$	15,900
October	4,100	$	26,400
November	5,300	$	31,400
December	4,900	$	27,950

  

Summary Output
Regression Statistics
Multiple R	.959
R Square	.920
Adjusted R2	.912
Standard Error	1,550.32
Observations	12.00

  

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	2,992.80	1,933.78	1.55	0.15	(1,315.92)	7,301.52
Machine Hours	5.37	0.50	10.70	0.00	4.25	6.49

  
Based on the results of the high-low analysis, the estimate of electricity costs in a month with 2,600 machine hours would be: (Round "Per unit" answer to 2 decimal places and all dollar amount to nearest whole dollar.)

Answer 1

Answer

• First, using High Low method, we should find out:
  Variable cost per machine hour, and
  Fixed cost per month.
• High Low working

	Months	Units	Cost
High Level	Nov	5,300	$                   31,400.00
Low Level	Mar	2,300	$                   13,700.00
Difference		3,000	$                   17,700.00
A	Difference in Cost		$                   17,700.00
B	Difference in units		3,000
C = A/B	Variable cost per unit		$                           5.900
Working		High Level	Low Level
A	Total Cost	$                 31,400.00	$                   13,700.00
B	Total Units	5300	2300
C	Variable cost per unit	$                           5.90	$                             5.90
D = B x C	Total Variable cost	$                 31,270.00	$                   13,570.00
E = A - D	Total Fixed Cost	$                       130.00	$                         130.00

• Variable cost = $ 5.90 per machine hour
  Fixed Cost = $ 130 per month.
• Requirement:
  Electricity cost for 2600 machine hours = $ 130 fixed cost + ($5.90 x 2600 MHs)
  = 130 + 15340
  = $ 15,470 Answer