Question

A company has the following financial information:

year	Labour (in hours)	machine costs (in $)
2009	1,200	103,266
2010	1,225	110,216
2011	1,100	97,579
2012	1,050	94,581
2013	1,160	111,762
2014	1,200	115,786
2015	1,350	136,476
2016	1,380	141,852
2017	1,250	128,679
2018	1,270	135,334
2019	1,220	132,222

Required

Using the high-low method, what are the estimated machine costs

1. if there are 1,100 Labour hours?
2. if there are zero Labour hours?
3. What is a significant drawback to using the High-low method to calculate costs at zero labour hours?

Answer 1

a

Month	Hours	Cost
2009	1,200	$         103,266
2010	1,225	$         110,216
2011	1,100	$           97,579
2012	1,050	$           94,581
2013	1,160	$         111,762
2014	1,200	$         115,786
2015	1,350	$         136,476
2016	1,380	$         141,852
2017	1,250	$         128,679
2018	1,270	$         135,334
2019	1,220	$         132,222
High	1,380	$         141,852
Low	1,050	$           94,581
Variable cost		143.25
= (141852-94581)/(1380-1050)
Fixed cost		(55,826.73)
= 141852-1380 × 143.25
Equation=	Cost   =   143.2455 × Hours + -55826.73
Cost at 1100 hours:		$   101,743.27
[ 1100 * 143.2455 + -55826.73

b

Month	Hours	Cost
2009	1,200	$         103,266
2010	1,225	$         110,216
2011	1,100	$           97,579
2012	1,050	$           94,581
2013	1,160	$         111,762
2014	1,200	$         115,786
2015	1,350	$         136,476
2016	1,380	$         141,852
2017	1,250	$         128,679
2018	1,270	$         135,334
2019	1,220	$         132,222
High	1,380	$         141,852
Low	1,050	$           94,581
Variable cost		143.25
= (141852-94581)/(1380-1050)
Fixed cost		(55,826.73)
= 141852-1380 × 143.25
Equation=	Cost   =   143.2455 × Hours + -55826.73
Cost at 0 hours:		$    (55,826.73)
[ 0 * 143.2455 + -55826.73

c

Cost can not be negative. At 0 hours it is providing negative cost which is a drawback of the method.

please rate.