Question

Using the data below calculate the cost function (y=mx+b) using the high low method

Note – there are only 22 data points (August and September of the 2nd year are missing)

	Actual Units	Actual Cost	Actual Units	Actual Cost
Jan	1000	100000	1510	14000
Feb	1100	106000	1650	130000
Mar	1175	105000	1450	115000
Apr	1250	120000	1200	112000
May	1410	128000	1210	130000
Jun	1520	132000	1900	154000
Jul	1600	135000	1890	162000
Aug	1710	140000
Sep	1800	148000
Oct	1970	150000	1600	143000
Nov	970	150000	1700	148000
Dec	1970	120000	1850	143000

Answer 1

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

= (150,000 - 100,000)/((1,970 - 1,000)

= 50,000/970

= $51.55 per unit (rounded to two decimals)

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

= 150,000 - (1,970 x 51.55)

= 150,000 - 101,553

= $48,447

Total cost = Number of units x Variable cost per unit + Fixed cost

= mx + b

= 51.55x + 48,447

Note: If variable cost per unit is not rounded to two decimals, the results will slightly differ from the results shown above.