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
Forklife depreciation
Low 3,500 $3,500
High 18,500 3,500
Indirect Labor:
Low 3,500 $50,100
High 18,500 119,100
Fuel and oil for Forklife
Low 3,500 $2,835
High 18,500 14,985
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.
2. Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 9,000 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 9,000 moves.