Question

Pearson Electric Company uses the high-low method to analyze mixed costs. The following information relates to the production data for the first six months of the year. Month Cost(Y) Hours(H) January $ 7,300 260 February $ 9,125 730 March $ 7,540 410 April $ 7,485 330 May $ 9,460 980 June $ 9,030 705 How should the cost function be properly stated using the high-low method?

Answer 1

Answer: 6520 + 3x

Explanation:

Firstly, we need to calculate the variable cost per hour which will be:

= (Highest activity cost – Lowest activity cost)/(Highest activity hour – Lowest activity hour)

= (9460 - 7300)/(980 - 260)

= 2160 / 720

= 3

We'll also find the fixed cost which will be:

= Fixed cost = Highest activity cost – (Variable cost per hour x Highest activity hour)

= 9460 - ( 3 x 980)

= 9460 - 2940

= 6520

Therefore, the cost function will be:

= 6520 + 3x