Question

The manager of the main laboratory facility at Center is interested in being able to predict the overhead costs each month for the lab. The manager believes that total overhead varies with the number of lab tests performed but that some costs remain the same each month regardless of the number of lab tests performed. The lab manager collected the following data for the first seven months of the year.
Month Number of Lab test performed Test Laboratory overhead cost
January 2,800 $21,500
February 2,600 $22,700
March 3,100 $27,900
April 3,550 $31,400
May 3,700 $28,500
June 1,200 $19,500
July 1,400 $14,500

Required:
Use the high-low method to determine the laboratory's cost equation for total laboratory overhead.

Answer 1

Answer:

Total cost formula= 6,388 + 6.76x

Explanation:

Giving the following information:

Month Number of Lab test performed Test Laboratory overhead cost

January 2,800 $21,500

February 2,600 $22,700

March 3,100 $27,900

April 3,550 $31,400

May 3,700 $28,500

June 1,200 $19,500

July 1,400 $14,500

To calculate the variable and fixed cost, we need to use the following formula:

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

Variable cost per unit= (31,400 - 14,500) / (3,700 - 1,200)

Variable cost per unit=  $6.76

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 31,400 - (6.76*3,700)

Fixed costs= $6,388

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 14,500 - (6.76*1,200)

Fixed costs= $6,388

Total cost formula= 6,388 + 6.76x