The Ladder Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: $\begin{array}{crr}\text { Month } & \text { Cost of Electricity } & \text { Direct Labor Hours }\
\hline\text { February } & \$ 8,100 & 750 \
\text { May } & 9,000 & 850 \
\text { August } & 10,200 & 1,000 \
\text { November } & 8,700 & 800
\end{array}$ Using the high-low method, which of the following is the best equation?
A)Y = $900 + $12.00X
B)Y = $900 + $8.40X
C)Y = $1,800 + $8.40X
D)Y = $2,400 + $8.40X

Question

Quizplus · Accepted Answer

The high-low method involves identifying the highest and lowest activity levels and using their costs to calculate the variable cost per unit of activity. Here, the highest activity level is 1,000 direct labor hours (August) with a cost of $10,200, and the lowest is 750 direct labor hours (February) with a cost of $8,100. The variable cost per unit is calculated as: $(\$10,200 - \$8,100) / (1,000 - 750) = \$2,100 / 250 = \$8.40$ per direct labor hour. To find the fixed cost, we substitute the variable cost and one of the activity levels into the cost equation $Y = a + bX$, where $Y$ is the total cost, $a$ is the fixed cost, $b$ is the variable cost per unit of activity, and $X$ is the level of activity. Using the August data: $10,200 = a + 8.40(1,000)$. Solving for $a$ gives $a = 10,200 - 8,400 = \$1,800$. Thus, the cost estimating equation is $Y = \$1,800 + \$8.40X$.

The Ladder Company Wants to Develop a Cost Estimating Equation