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	$	8,050			335
February	$	9,750			780
March	$	8,040			460
April	$	8,110			380
May	$	10,210			1,055
June	$	9,510			755

What is the estimated total cost at an operating level of 1,180 hours, using the high-low method? (Round variable cost per unit to 2 decimal places.)

Answer 1

• First calculate Variable cost per hour and Fixed cost per month using High Low method
  Note: Units = Hours

	Months	Units	Cost
High Level	May	1,055	$                   10,210.00
Low Level	Jan	335	$                     8,050.00
Difference		720	$                     2,160.00
A	Difference in Cost		$                     2,160.00
B	Difference in units		720
C = A/B	Variable cost per unit		$                           3.000
Working		High Level	Low Level
A	Total Cost	$                 10,210.00	$                     8,050.00
B	Total Units	1055	335
C	Variable cost per unit	$                           3.00	$                             3.00
D = B x C	Total Variable cost	$                   3,165.00	$                     1,005.00
E = A - D	Total Fixed Cost	$                   7,045.00	$                     7,045.00

• Variable cost = $ 3 per hour
• Fixed Cost = $ 7045 per month
• Requirement:
  Estimated Total cost of 1180 hours = $ 7045 + ($3.00 x 1180 hours)
  = 7045 + 3540
  = $ 10,585 Answer