Author Question: Account analysis, high-low Luwak Coffees wants to find an equation to estimate monthly utility ... (Read 54 times)

kamilo84 · **on:** Jul 6, 2018

Account analysis, high-low

Luwak Coffees wants to find an equation to estimate monthly utility costs. Luwak has been in business for one year and has collected the following cost data for utilities:

Required:
1. Which of the preceding costs is variable? Fixed? Mixed? Explain.
2. Using the high-low method, determine the cost function for each cost.
3. Combine the preceding information to get a monthly utility cost function for Java Joe's.
4. Next month, Luwak expects to use 4,400 kilowatt hours of electricity, make 3,000 minutes of telephone calls, and use 64,000 gallons of water. Estimate total cost of utilities for the month.

Question 2

The official list of all the accounts is called the chart of accounts.
a. True
b. False
Indicate whether the statement is true or false

bassamabas · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

Note: In some print versions of the text, requirement 3 refers to the company as Java Joe's rather than the correct name of Luwak Coffees.
1. The electricity cost is variable because, in each month, the cost divided by the number of kilowatt hours equals a constant 0.30. The definition of a variable cost is one that remains constant per unit.

The telephone cost is a mixed cost because the cost neither remains constant in total nor remains constant per unit.

The water cost is fixed because, although water usage varies from month to month, the cost remains constant at 120.

2. The month with the highest number of telephone minutes is June, with 2,880 minutes and 197.60 of cost. The month with the lowest is April, with 1,960 minutes and 179.20. The difference in cost (197.60 179.20), divided by the difference in minutes (2,880 1,960) equals 0.02 per minute of variable telephone cost. Inserted into the cost formula for June:

197.60 = a fixed cost + (0.02 number of minutes used)
197.60 = a + (0.02 2,880)
197.60 = a + 57.60
a = 140 monthly fixed telephone cost

Therefore, Luwak's cost formula for monthly telephone cost is
Y = 140 + (0.02 number of minutes used)

3. The electricity rate is 0.30 per kw hour
The telephone cost is 140 + (0.02 per minute)
The fixed water cost is 120.

Adding them together we get:

Fixed cost of utilities = 140 (telephone) + 120 (water) = 260

Monthly Utilities Cost = 130 + (0.30 per kw hour) + (0.02 per telephone min.)

4. Estimated utilities cost = 260 + (0.30 4,400 kw hours) + (0.02 3,000 minutes)
= 260 + 1,320 + 60 = 1,640

Answer to Question 2

True