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	$	8,350	365
February	$	10,000	800
March	$	8,240	480
April	$	8,360	400
May	$	10,510	1,085
June	$	9,750	775

How should the cost function be properly stated using the high-low method?

Answer 1

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

= (10,510 - 8,350)/(1,085 - 365)

= 2,160/720

= $3

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

= 10,510 - ( 3 x 1,085)

= 10,510 - 3,255

= $7,255

Cost function :

(Y) Total cost = Fixed cost + (Variable cost per hour x Number of hour)

Y = 7,255 + 3 x