Question

Q.1 For Divaxo Company, labor-hours are 28,000 and wages $126,000 at the high point of the relevant range, and labor-hours are 20,000 and wages $102,000 at the low point of the relevant range.

What is the estimated total labor costs at Divaxo Company when 11,100 labor-hours are used?

		$52,725
		$75,300
		$49,950
		$56,610

Answer 1

Using the high low method we will first compute the variable cost per labor hour

y2 = $126,000 and y1 = $102,000

x2 = 28,000 hours and x1 = 20,000 hours

Thus variable cost per labor hour = (126,000-102,000)/(28,000-20,000)

= 24,000/8,000

$3 per labor hour

Thus the cost equation is y = a+3x.

So a = y2-bx2 = 126,000 - (3*28,000)

= 126,000 - 84,000

= 42,000

When 11,100 labo hours is used then cost will be:

42,000+(11,100*3)

= 42000+33300

= $75,300 (i.e. the 2nd option)