Question

Fromme's Frocks has the following machine hours and production costs for the last six months of last year:

Month

Machine Hours

Production Cost

July

15,000

$12,075

August

13,500

10,800

September

11,500

9,580

October

15,500

12,080

November

14,800

11,692

December

12,100

9,922

If Fromme expects to incur 14,000 machine hours in January, what will be the estimated total production cost using the high-low method?

Answer 1

The high low method is used to estimate the fixed and variable costs by comparing the relationship of the Highest and Lowest value of costs to the highest and lowest value of units (machine hours in this case).

Variable Cost per unit can be calculated using the formulae:

Highest Cost = $ 12,080

Lowest Cost = $ 9,580

Highest Units = 15,500 machine hours

Lowes Units = 11,500 machine hours

Therefore,

Variable Cost per unit = (12,080 - 9,580) / (15,500 - 11,500)

= $ 0.625 per unit

We can calculate fixed cost using the formulae:

= 12,080 - (15,500 x 0.625)

=12080 - 9,688

Fixed Cost = $ 2,392 per months

At expected 14,000 machine hours

Estimated Total Production Cost = Fixed Cost + (Estimated units x variable cost per unit)

= 2,392 + (14,000 x 0.625)

= 2392 + 8750

=$ 11,142

Therefore the estimated total production cost using high low method is $ 11,142