Question

Fromme's Frocks has the following machine hours and production costs for the last six months of last year:

Month Machine Hours Production Cost July 16,600 $ 12,155 August 15,100 12,400 September 13,100 9,740 October 17,100 12,240 November 16,400 11,772 December 13,700 9,970 If Fromme expects to incur 12,200 machine hours in January, what will be the estimated total production cost using the high-low method?
a. $19,865.00.
b. $7,625.00.
c. $9,177.50.
d. $8,732.63.

Answer 1

To use the high-low method, we need to identify the highest and lowest level of activity and the corresponding production costs, and then use these values to calculate the variable cost per machine hour and the fixed cost component.

From the data provided, we can see that the highest level of machine hours occurred in October (17,100) and the lowest in December (13,700). Therefore, we will use these two months to calculate the variable and fixed costs.

Variable costs = (change in cost) / (change in activity) = ($12,240 - $9,970) / (17,100 - 13,700) = $770 / 3,400 = $0.226 per machine hour

Fixed costs = Total production cost at either the high or low activity level - (Variable cost per machine hour x high or low activity level)

Using the high activity level of 17,100 machine hours:

Fixed costs = $12,240 - ($0.226 x 17,100) = $8,732.60

Finally, to estimate the total production cost for January, we simply add the fixed and variable costs for that level of activity:

Total production cost = $0.226 x 12,200 + $8,732.60 = $11,921.20

Therefore, the estimated total production cost using the high-low method would be closest to option (d) $8,732.63.