Question

The Shapely Company uses the high-low method to determine its cost equation. The following information was gathered for the past year: Machine Hours Direct Labor costs Busiest month(June) 14,250 $ 710,000 Slowest month (December) 9,250 $ 570,000 If Shapely expects to use 11,500 machine hours next month, what are the estimated direct labor costs? $633,000. $937,405. $462,000. $379,511.

Answer 1

Answer:

$633,000.

Explanation:

We use the High-low method to get the cost formula:

$\left[\begin{array}{ccc}High&14,250&710,000\\Low&9,250&570,000\\Diference&5,000&140,000\\\end{array}\right]$

This means 5,000 machine hours generate 140,000 labor cost

We divide and get the variable cost generate per machine hour:

Cost 140000

machine hours 5000

140,000/5,000 = 28

variable cost 28

Next, we use this to calculate the fixed cost:

total cost = variable cost + fixed cost

fixed cost = total cost - 28 X DL

High:

Total Cost 710,000

Variable 399,000 (14,250 x 28)

Fixed Cost 311,000

Low:

Total Cost 570,000

Variable 259,000 (9,250 x 28)

Fixed Cost 311,000

Now with the cost formula we solve for 11,500 machine hours

cost = 311,000 + 28 X Machine Hours

cost = 311,000 + 28 x 11,500

cost = 633,000