The Mortise Company has assembled the following data pertaining to certain costs
ID: 2588070 • Letter: T
Question
The Mortise Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Mortise has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.
Month Cost Hours
January $40,000 3,600
February 38,500 3,000
March 36,280 3,300
April 38,000 3,500
May 69,850 5,850
June 45,000 4,250
Requirement a. What is the slope coefficient?
The slope coefficient is $
.
Requirement b. What is the constant for the estimated cost equation?
The constant is $
.
Requirement c. What is the estimated cost function for the above data?
= $
+ $
Requirement d. What is the estimated total cost at an operating level of 3,100 hours?
The estimated total cost at an operating level of 3,100 hours is $
.
The slope coefficient is $
.
Explanation / Answer
a) The slope coefficient (variable cost per hour) for the highest and lowest values of the cost driver
= ($69,850-$38,500)/(5,850-3,000) = $31,350/2,850 = $11 per hour
b) The constant (i.e. Fixed cost) = Total cost - (variable cost per hour*hours)
= $69,850-($11*5,850) = $5,500
c) The estimated cost function :-
y = a+bX
where, a = $5,500
b = $11
y = $5,500+$11X
d) The estimated total cost at an operating level of 3,100 hours is:-
y = $5,500+($11*3,100) = $5,500+$34,100 = $39,600
Therefore the estimated total cost for 3,100 hours is $39,600