Question

The Missou Manufacturing Company recorded overhead costs of $14,182 at an activity level of 4,200 machine hours and $8,748 at 2,300 machine hours. What is the total estimated cost for 2,600 machine hours using the high-low method to estimate the cost equation

Answer 1

$9,606

Step-by-step explanation:

The computation of the fixed cost and the variable cost per hour by using high low method is shown below:

Variable cost per hour = (High overhead cost - low overhead cost) ÷ (High machine hours - low machine hours)

= ($14,182 - $8,748) ÷ (4,200 hours - 2,300 hours)

= $5,434 ÷ 1,900 hours

= $2.86

Now the fixed cost equal to

= High overhead cost - (High machine hours × Variable cost per hour)

= $14,182 - (4,200 hours × $2.86)

= $14,182 - $12,012

= $2,170

Now the estimated operating expenses would be

= Fixed cost + expected machine hours × variable cost per hours

= $2,170 + 2,600 machine hours × $2.86

= $2,170 + $7,436

= $9,606