Question

The following are historical assembly costs and corresponding number of components for the Precision Manufacturing Co.

Month	Assembly Cost (Y)	Components (X)
January	37,697	12,817
February	25,918	7,648
March	21,195	7,206
April	27,965	8,390
May	31,316	8,142
June	22,892	5,723
July	33,613	11,765
August	23,372	7,012
September	35,532	9,949
October	35,095	9,125
November	35,033	11,211
December	24,076	6,019

1. Utilizing the High-Low method determine the cost function for the assembly department.
2. Estimate the cost to assemble 8700, 9500 and 12000 components.
3. Would it be appropriate to use the cost function to estimate the cost to assemble 100,000

Answer 1

1]	Variable component of the cost fuction = (Assembky cost at the highest level of activity-Assembly cost at the lowest level of activity)/(Units at highest level of activity-Units at the lowest level of activity) =
	= (37697-22892)/(12817-5723) =	$               2.09
	Fixed component of the cost function = 37697-12817*2.09 =	$           10,909
	Cost function for the assembly department [y] = $10,909+2.09x
	where y = the assembly cost and x = Units of activity
2]	Cost to assemble 8700 components = 10909+8700*2.09 =	$           29,092
	Cost to assemble 9500 components = 10909+9500*2.09 =	$           30,764
	Cost to assemble 12000 components = 10909+12000*2.09 =	$           35,989
3]	The above cost function is not appropriate when the
	number of units is 100,000, as, it is not within the range
	of activity units, ffrom which, the cost function is worked out.