Question

High-Low Method. Castanza Company produces computer printers. Management wants to estimate the cost of production equipment used to produce printers. The company reported the following monthly cost data related to production equipment:

Reporting Period (Month)	Total Costs	Machine Hours
January	$   920,000	45,000
February	600,000	25,000
March	500,000	20,000
April	1,100,000	90,000
May	1,140,000	95,000
June	620,000	30,000
July	880,000	38,000
August	910,000	48,000
September	1,060,000	78,000
October	960,000	51,000
November	1,400,000	96,000
December	980,000	54,000

Required:

1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
2. What would Castanza Company’s estimated costs be if it used 50,000 machine hours next month?
3. What would Castanza Company’s estimated costs be if it used 15,000 machine hours next month? Why should you feel uncomfortable estimating costs for 15,000 machine hours?

Answer 1

Reporting Period (Month)	Total Costs	Machine Hours
January	9,20,000	45,000
February	6,00,000	25,000
March	5,00,000	20,000
April	11,00,000	90,000
May	11,40,000	95,000
June	6,20,000	30,000
July	8,80,000	38,000
August	9,10,000	48,000
September	10,60,000	78,000
October	9,60,000	51,000
November	14,00,000	96,000
December	9,80,000	54,000
Max	14,00,000	96,000
Min	5,00,000	20,000
	Cost	Machine Hr
High	1400000	96000
Low	500000	20000
Variable cost per unit	(1400000-500000)/(96000-20000)
	11.84210526
Round	11.84
Variable cost= 11.84 per unit
Fixed cost=	Highest activity cost- ( Variable cost per unit*Highest activity units)
Fixed cost=	1400000- (11.84*96000)
Fixed cost=	263360
Equation
Y=	263360+11.84X
Estimated cost if 50,000 machine hrs used
Cost	=	263360+11.84X
	=	263360+11.84*50000
	=	263360+(11.84*50000)
	=	855360
Estimated cost if 15,000 machine hrs used
Cost	=	263360+11.84X
	=	263360+11.84*15000
	=	263360+(11.84*15000)
	=	440960
We should feel uncomfortable to use 15000 hr because it is the lowest activity hrs. If we use 15000 machine hrs then our computaiton of
varable cost will also become different because our whole assumption was based on 20000 machine hours.

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