Question

Quantum Company uses the highminuslow method to estimate the cost function. The information for 2017 is provided​ below: Machineminushours Labor Costs Highest observation of cost driver 1 comma 000 $ 32 comma 000 Lowest observation of cost driver 200 $ 16 comma 000 What is the estimated cost function for the above​ data? A. y​ = 32 comma 000 ​+ 32X B. y​ = 12 comma 000 ​+ 20X C. y​ = 20 comma 000 ​+ 80X D. y​ = 16 comma 000 ​+ 40X

Answer 1

Answer:

The correct option is B,y​ = 12 comma 000 ​+ 20X

Explanation:

Total =fixed cost+(variable cost*X)

where X is quantity of items produced

Variable cost=Highest observation cost-lowest observation/highest machine hours-lowest machine hours

variable cost=$32,000-$16,000/(1000-200)=$20

Substituting the variable cost in highest activity figures,we would arrive at fixed cost

$32000=fixed cost+($20*1000)

$32000=fixed cost+$20,000

fixed cost=$32,000-$20,000=$12,000

The correct option is B,y=12,000+20X

The y stands for total cost