Question

Presented below are the production data for the first six months of the year for the mixed costs incurred by Clayton Company. Month Cost Units January $5,260 4,100 February $5,000 4,000 March $6,810 5,520 April $9,900 9,000 May $5,900 4,960 June $7,390 6,510 Clayton Company uses the high-low method to analyze mixed costs. How would the cost function be stated

Answer 1

Answer:

Cost function = 1080 + 0.98x

Where x is the number of units

Explanation:

Using the high low method we calculate the variable element in a mixed cost.

The variable cost per unit can be calculated as,

Variable cost per unit = (Highest activity cost - Lowest activity cost) / (Highest activity units - Lowest activity units)

The highest activity is in April with 9000 units and a cost of $9900 and the lowest activity is in February with 4000 units and a a cost of $5000.

Variable cost per unit = (9900 - 5000) / (9000 - 4000)

Variable cost per unit = $0.98 per unit

So, total fixed cost is = 9900 - (0.98 * 9000)   = $1080

Cost function = 1080 + 0.98x

Where x is the number of units