Hook Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: $$\begin{array} { c c c }
\text { Month } & \text { Cost of Electricity } & \text { Direct labour Hours } \
\text { January } & £ 8,100 & 750 \
\text { April } & 9,000 & 850 \
\text { July } & 10,200 & 1,000 \
\text { October } & 8,700 & 800
\end{array}$$ 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

Hook Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: $$\begin{array} { c c c } 
\text { Month } & \text { Cost of Electricity } & \text { Direct labour Hours } \
\text { January } & £ 8,100 & 750 \
\text { April } & 9,000 & 850 \
\text { July } & 10,200 & 1,000 \
\text { October } & 8,700 & 800
\end{array}$$ 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

Quizplus · Accepted Answer

The high-low method involves taking the highest and lowest activity levels and using their costs to determine the variable cost per unit of activity. Here, the highest activity level is in July (1,000 hours) with a cost of £10,200, and the lowest is in January (750 hours) with a cost of £8,100. The difference in cost (£10,200 - £8,100 = £2,100) divided by the difference in hours (1,000 - 750 = 250 hours) gives a variable cost per hour of £8.40. To find the fixed cost, we can use one of the points, say the highest: £10,200 = Fixed Cost + (£8.40 * 1,000). Solving for Fixed Cost gives £1,800. Thus, the cost equation is Y = £1,800 + £8.40X.

Hook Company Wants to Develop a Cost Estimating Equation for Its