Question

Morrow Company uses the high-low method to estimate the cost function. The information for 2020 is provided below: Machine-hours Labor Costs Highest observation of cost driver 900 $36,000 Lowest observation of cost driver 100 $14,000 What is the estimated total cost when 450 machine-hours are used

Answer 1

Total cost at 450 machine hours = $23625

Step-by-step explanation:

The high-low method is used to calculate the variable cost per unit element in a mixed cost. A mixed cost is a cost which is made up of both the fixed and the variable cost. The formula for variable cost per unit is,

Variable cost per unit = (Highest activity cost - Lowest activity cost) / (Highest activity units - Lowest activity units)

Variable cost per unit = (36000 - 14000) / (900 - 100)

Variable cost per unit = $27.5

Thus, the fixed element is = 36000 - (27.5 * 900)

Fixed cost element = $11250

Thus, the cost equation is,

Total cost = 27.5x + 11250

Where x is the number of machine hours.

Total cost at 450 machine hours = 27.5 * 450 + 11250

Total cost at 450 machine hours = $23625