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 January February March April May Cost(Y) $ 8,920 $10,875 $ 8,940 $ 9,235 $11,080 $19,590 Hours (H) 460 870 550 470 1,180 845 June What is the estimated total cost at an operating level of 1,180 hours, using the high-low method? (Round variable cost per unit to 2 decimal places.)

Answer 1

Answer:

Option 1st is correct. i.e $11,080.

First calculate Variable cost per hour and Fixed cost per month using High Low method
Note: Units = Hours
	Months	Units	Cost($)
High Level	May	1,180	11,080
Low Level	Jan	460	8,920
Difference		720	2,160
A	Difference in Cost		2,160
B	Difference in units		720
C = A/B	Variable cost per unit		3.00
Working		High Level	Low Level
A	Total Cost	11,080	8,920
B	Total Units	1,180	460
C	Variable cost per unit	3	3
D = B x C	Total Variable cost	3,540	1,380
E = A - D	Total Fixed Cost	7,540	7,540
Variable cost = $ 3 per hour
Fixed Cost = $ 7540 per month
Requirement:
Estimated Total cost of 1180 hours = $ 7540 + ($3.00 x 1180 hours)
10585
= $ 11,080 Answer