[The following information applies to the questions displayed below.] Phillips Company manufactures air-conditioning units for commercial buildings and has noticed considerable variation in shipping expenses from month to month as per the data below: Month Units Shipped Total Shipping ExpenseJanuary 4 $ 2,240 February 4 $ 3,140 March 5 $ 2,650 April 2 $ 1,296 May 3 $ 2,220 June 6 $ 3,060 July 8 $ 4,416 4. What is the cost formula for shipping expenses?
Question
[The following information applies to the questions displayed below.] Phillips Company manufactures air-conditioning units for commercial buildings and has noticed considerable variation in shipping expenses from month to month as per the data below: Month Units Shipped Total Shipping ExpenseJanuary 4 3,140 March 5 1,296 May 3 3,060 July 8 $ 4,416 4. What is the cost formula for shipping expenses?
Solution
To find the cost formula for shipping expenses, we need to determine the variable cost per unit and the fixed cost.
Step 1: Calculate the variable cost per unit This is done by finding the change in cost divided by the change in units.
For example, between February and January, the change in cost is 3140 - $2240) and the change in units is 0 (4 units - 4 units). However, this calculation would result in a division by zero, which is undefined. So, we need to choose two months where the number of units shipped changes.
Let's use March and February. The change in cost is 2650 - 510 / 1 = $510.
Step 2: Calculate the fixed cost This is done by subtracting the total variable cost from the total cost for a given month.
Using the variable cost per unit calculated in step 1, the total variable cost for February (4 units) would be 4 * 2040. The total cost for February is 3140 - 1100.
So, the cost formula for shipping expenses is 510 per unit.
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