Question

The Connors Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Connors Company has heard about a method of measuring cost functions called the highlow method and has decided to use it in this situation.

Answer 1

Estimated total cost at an operating level of 9,000 hours will be $38,200.

SOLUTION: -

As per high low method

Variable cost = Change in cost / Change in hours = (High cost - Low cost) / (High hours - Low hours).

• Particular      Cost                     Hours

• High              $42,000             10,000

• Low               $23,000              5,000

• Change         $19,000              5,000

Variable cost = $19,000 / 5,000

= $3.80 per hour

Fixed cost = Total cost - variable cost

= $23,000 - ( $3.80 × 5,000 )

= $23,000 - $19,000

= $4,000

Estimated total cost at an operating level of 9,000 hours

Fixed cost + Variable cost

= $4,000 + ( $3.80 × 9,000  hours)

= $4,000 + $34,200

= $38,200

Therefore, Estimated total cost at an operating level of 9,000 hours is = $38,200.

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Correct Question - The Connors Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Connors Company has heard about a method of measuring cost functions called the high−low method and has decided to use it in this situation.

Cost                   Hours

$24,360             5,800

$26,500             6,100

$34,800             7,850

$42,360             13,000

$38,800             9,400

What is the Estimated total cost at an operating level of 9,000 hours?