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

Quizplus · Accepted Answer

The high-low method involves identifying the highest and lowest activity levels and using their costs to calculate the variable cost per unit. The difference in cost between the highest and lowest activity levels is divided by the difference in units to find the variable cost per unit. Then, the total fixed cost is found by subtracting the total variable cost at either level from the total cost at that level.High activity level: 10,000 units with a total cost of $22,500Low activity level: 7,000 units with a total cost of $16,500Variable cost per unit = $\frac{\$22,500 - \$16,500}{10,000 - 7,000} = \frac{\$6,000}{3,000} = \$2.00$ per unitTo find the total fixed cost, we use one of the activity levels. Using the high activity level:Total cost = Fixed cost + (Variable cost per unit × Number of units)$22,500 = Fixed cost + ($2.00 × 10,000)Fixed cost = $22,500 - $20,000 = $2,500Therefore, 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