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Unformatted text preview: for electricity that an organization must incur even if it uses none at all. Costs then increase in a linear fashion in accordance
with the number of kilowatt hours used. Similar cost patterns exist for other utilities as well, such as telephone
Estimating Cost-Volume Relationships
In working with cost information, it sometimes is difficult to separate fixed from variable costs. This is especially problematic when a cost is semi-variable. To make the separation, one needs at least two historical or projected data points, preferably more.
The Two-Point Method. With two data points, we can draw a straight line and determine where it intersects
the vertical axis. We can use algebra to determine both its slope and its fixed-cost component. As an example, suppose a company used 10,000 kilowatt hours of electricity in June and 12,000 kilowatt hours in July. The June electric bill was $1,500; the July electric bill was $1,700. To compute the fixed and variable components of the cost
line, we would take the following steps:
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- Spring '14