Question

The Morrow Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Morrow Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Month Cost Hours January $40,000 3,730 February $37,600 3,200 March $42,800 3,480 April $50,200 5,000 May $68,400 6,000 June $61,200 4,250 What is the estimated total cost at an operating level of 3,400 hours

Answer 1

Answer:

$39,800

Explanation:

From the question above Morrow company has decided to use the measuring cost function method to find its total cost

- $68,400 is the highest cost and $37,600 is the lowest cost

- 6,000 is the highest number of hours and 3,200 is the lowest

The first step is to calculate the cost driver. Let's use the alphabet c to represent the cost driver

(68,400-37,600) / (6,000-3,200)

c = 30,800/2,800

c= $11

Cost driver= $11

The next step is to find the fixed cost. Let's use the alphabet f to represent the fixed cost

68,400= f + ( 11×6000)

68,400= f + 66,000

f= 68,400-66,000

f= $2,400

Fixed cost= $2,400

The final step is to calculate the cost function

Cost function= fixed costs+variable costs×number of units

Fixed cost= $2,400

Variable cost= $11

Number of units= 3,400 hours

= 2,400+(11×3,400)

= 2,400+ 37,400

= $39,800

Hence the total cost at an operating level of 3,400 hours is $39,800