C-Drive Components has collected the following production data for the past four months: $$\begin{array} { c r }
\text { Units produced } & \text { Total cost } \
\hline 7,000 & \$ 16,500 \
10,000 & 22,500 \
8,500 & 17,750 \
9,000 & 21,000
\end{array}$$ If the high-low method is used, what is the monthly total cost equation?

Question

C-Drive Components has collected the following production data for the past four months: $$\begin{array} { c r } 
\text { Units produced } & \text { Total cost } \
\hline 7,000 & \$ 16,500 \
10,000 & 22,500 \
8,500 & 17,750 \
9,000 & 21,000
\end{array}$$ If the high-low method is used, what is the monthly total cost equation?

Quizplus · Accepted Answer

The high-low method is used to estimate the variable cost per unit and the fixed cost component of a cost function. The variable cost per unit is calculated as the difference between the total cost at the highest level of production and the total cost at the lowest level of production, divided by the difference in the number of units produced at those two levels. The fixed cost component is calculated as the total cost at the lowest level of production, minus the variable cost per unit multiplied by the number of units produced at that level.In this case, the highest level of production is 10,000 units and the total cost at that level is $22,500. The lowest level of production is 7,000 units and the total cost at that level is $16,500. The difference in the number of units produced at those two levels is 10,000 - 7,000 = 3,000 units. The variable cost per unit is calculated as ($22,500 - $16,500) / 3,000 = $2.00 per unit. The fixed cost component is calculated as $16,500 - ($2.00 × 7,000) = $2,500.Therefore, the monthly total cost equation is Total cost = $2,500 + ($2.00 × units produced).

C-Drive Components Has Collected the Following Production Data for the Past