Question

Pearson Electric Company uses the high-low method to analyze mixed costs. The following information relates to the production data for the first six months of the year.

Month	Cost(Y)		Hours(H)
January	$	8,220	365
February	$	10,000	800
March	$	8,240	480
April	$	8,360	400
May	$	10,380	1,085
June	$	9,750	775

How should the cost function be properly stated using the high-low method?

rev: 10_11_2019_QC_CS-185082

Multiple Choice

• Y = $6,630 + $2.00H.

• Y = $7,125 + $3.00H.

• Y = $6,690 + $2.00H.

• Y = $6,855 + $3.00H.

Answer 1

Option (b) is correct

In high low method, first we calculate the variable cost per hour by the following formula:

Variable cost per hour = Highest activity cost - Lowest activity cost / Highest number of hours - Lowest number of hours

We have,

Highest activity cost = $10380 in May

we will take hours in May as Highest number of hours, which is 1085 hours

Lowest activity cost = $8220 in January

we will take hours in January as lowest number of hours, which is 365

Now, putting these values in the above formula, we get,

Variable cost per hour = ($10380 - $8220) / 1085 - 365

Variable cost per hour = $2160 / 720

Variable cost per hour = $3 per hour

Now, we will calculate fixed cost as per below:

Fixed cost = Highest activity cost - (Variable cost * Highest number of hours)

Putting the values in the above formula, we get,

Fixed cost = $10380 - ($3 * 1085)

Fixed cost = $10380 - $3255

Fixed cost = $7125

Now, the cost function is:

Cost function (Y) = Fixed cost + Variable cost per hour * Total number of hours

Y = $7125 + $3H