High-Low Method, Cost Formulas The controller of the South Charleston plant of Ravinia, Inc., monitored activities associated with materials handling costs. The high and low levels of resource usage occurred in September and March for three different resources associated with materials handling. The number of moves is the driver. The total costs of the three resources and the activity output, as measured by moves for the two different levels, are presented as follows: Resource Number of Moves Total Cost Forklift depreciation: Low 5,000 $1,600 High 15,000 1,600 Indirect labor: Low 5,000 $74,000 High 15,000 136,000 Fuel and oil for forklift: Low 5,000 $3,550 High 15,000 10,650 Required: If required, round your answers to two decimal places. Enter a "0" if required. 1. Determine the cost behavior formula of each resource. Use the high-low method to assess the fixed and variable components. Forklift depreciation: V $ F $ Y $ Indirect labor: V $ F $ Y $ + $ X Fuel and oil for forklift: V $ F $ Y $ X 2. Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 8,000 moves. Forklift depreciation $ Indirect labor $ Fuel and oil for forklift $ 3. Construct a cost formula that can be used to predict the total cost of the three resources combined. If required, round your answers to two decimal places. Materials handling cost = $ + $ X Using this formula, predict the total materials handling cost if activity output is 8,000 moves. Y = $.

South Charleston Plant of Ravinia, Inc.

1. Cost behavior formula:

Forklift depreciation = $1,600 + $0q

Indirect labor = $43,000 + $6.20q

Fuel and oil for forklift = $3,550 + $0.71 (q - 5,000)

2. Cost of each item for an activity output level of 8,000 moves:

Forklift depreciation = $1,600

Indirect labor =  $92,600

Fuel and oil for forklift = $5,680

3. Total cost formula = $48,150 + $6.47q

Materials handling cost = $99,880

Explanation:

a) Data and Calculations:

Resource                        Number of Moves   Total Cost

Forklift depreciation:    

Low                                           5,000                $1,600

High                                        15,000                   1,600

Indirect labor:

Low                                          5,000             $74,000

High                                       15,000              136,000

Fuel and oil for forklift:

Low                                        5,000               $3,550

High                                      15,000               10,650

Cost behavior formula for each resource:

Forklift depreciation:

Low                                           5,000                $1,600

High                                        15,000                   1,600

Difference                              10,000                  $0

Variable cost per unit = $0 ($0/10,000)

Fixed cost = $1,600

Cost behavior formula = $1,600 + $0q

Indirect labor:

Low                                          5,000             $74,000

High                                       15,000              136,000

Difference                             10,000               62,000

Variable cost per unit = $6.20 ($62,000/10,000)

Fixed cost = $43,000 ($74,000 - ($6.20*5,000))

Cost behavior formula = $43,000 + $6.20q

Fuel and oil for forklift:

Low                                        5,000               $3,550

High                                      15,000               10,650

Difference                            10,000               $7,100

Variable cost per unit = $0.71 ($7,100/10,000)

Fixed cost = $3,550 ($3,0 - ($0.71 * (15,000 - 5,000))

Step cost

Cost behavior formula = $3,550 + $0.71 (q - 5,000)

Forklift depreciation = $1,600 + $0 * 8,000 = $1,600

Indirect labor = $43,000 + $6.20 * 8,000 = $92,600

Fuel and oil for forklift = $3,550 + $0.71 (8,000 - 5,000) = $5,680

Total cost formula:            Fixed   +  Variable

Forklift depreciation =      $1,600 + $0 * 8,000 = $1,600

Indirect labor =              $43,000 + $6.20 * 8,000 = $92,600

Fuel and oil for forklift = $3,550 + $0.71 (8,000 - 5,000) = $5,680

                                      $48,150 + $51,730 = $99,880

= $48,150 + $6.47q ($51,730/8,000)

Materials handling cost = ($1600 + $43000) + ($6.20 + $0.71) X

= $44600 + $6.91 X

Y = $44600 + ($6.91 x 8000)

= $44600 + $55280

= $99880

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