Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a four-month period: $\begin{array}{ccc}\text { Month } & \text { Direct Labor Hours } & \text { Production Costs }\\hline
\text { May } & 3,600 & \$ 15,000 \
\text { June } & 4,800 & 17,500 \
\text { July } & 6,000 & 20,000 \
\text { August } & 4,800 & 17,500 \
\text { Total } & 19,200 & \$ 70,000
\end{array}$
Let
A = Fixed production costs per month
B = Variable production costs per direct labor hour
N = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation
Using the high-low method, what is the cost formula for estimating costs?
A)Total cost = $20,000 + $2.08X
B)Total cost = $7,500 + $2.08X
C)Total cost = $5,000 + 2.08X
D)Total cost = $2.08X

Question

Quizplus · Accepted Answer

The high-low method involves taking the highest and lowest activity levels and using them to estimate fixed and variable costs. The variable cost per direct labor hour (V) is calculated as $(\text{Cost at highest activity level} - \text{Cost at lowest activity level}) / (\text{Highest activity level in hours} - \text{Lowest activity level in hours})$. Here, it's $(\$20,000 - \$15,000) / (6,000 - 3,600) = \$5,000 / 2,400 = \$2.08$. To find the fixed cost (F), we use the formula $F = \text{Total cost} - (V \times \text{Direct labor hours})$. Using any month's data, for example, May: $F = \$15,000 - (\$2.08 \times 3,600) = \$15,000 - \$7,488 = \$7,512$, which rounds to approximately \$7,500. Thus, the cost formula is Total cost = $7,500 + $2.08X.

Longberry Corporation Manufactures and Sells Party Items Let a = Fixed Production Costs Per Month B =

Longberry Corporation Manufactures and Sells Party Items Let
a = Fixed Production Costs Per Month
B =