Question

The Connors Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Connors Company has heard about a method of measuring cost functions called the highminuslow method and has decided to use it in this situation. Cost Hours $ 22 comma 000 5 comma 500 $ 26 comma 900 6 comma 250 $ 35 comma 000 7 comma 750 $ 40 comma 000 10 comma 300 $ 38 comma 600 9 comma 200 What is the cost​ function?

Answer 1

The cost function is:

Mixed cost = 3.75x + 1375

Step-by-step explanation:

A mixed cost is a cost that contains an element of both the fixed and the variable cost in it. The variable element per unit in a mixed cost can be calculated using the high low method. The formula for variable cost per unit under the high low method is,

Variable cost per unit = ( Cost at highest activity level - Cost at lowest activity level) / ( units of highest activity level - units of lowest activity level)

The units of activity level here are hours. The highest activity level here is 10300 hours and the lowest activity level here is 5500 hours.

The variable cost per hour = (40000 - 22000) / (10300 - 5500)

Variable cost per hour = $3.75

The total fixed cost in this mixed cost = 22000 - (3.75 * 5500) = $1375

Thus the cost function is = 3.75x + 1375

Where x is the number of hours