The Ladder Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: 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

The Ladder Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data:  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

Using the high-low method, the highest month for electricity cost is $2,400, and the lowest month is $900. The difference between the two is $1,500, and the highest month occurred in December when 2,000 units were used. Therefore, the variable cost per unit is:

Variable Cost per Unit (VCU) = (Highest cost - Lowest cost) / (Highest units - Lowest units)
VCU = ($2,400 - $900) / (2,000 - 1,000) = $1.50/unit

To determine the fixed cost, we can use either the highest or lowest month:

Fixed Cost (FC) = Highest Cost - (VCU x Highest units)
FC = $2,400 - ($1.50/unit x 2,000 units) = $1,800

Thus, the cost estimating equation is:

Y = $1,800 + $1.50X
Simplifying and converting to dollars:

Y = $1,800 + ($0.015/kWh x X)
Y = $1,800 + $0.015X

Therefore, the best equation is choice C.

The Ladder Company Wants to Develop a Cost Estimating Equation