Figure 3-5
Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a four-month period:

-Refer to Figure 3-5. 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

Figure 3-5
Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a four-month period:
 
-Refer to Figure 3-5. 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

Quizplus · Accepted Answer

To use the high-low method, we first need to identify the highest and lowest levels of activity (in this case, direct labor hours) and their corresponding total costs. 
The highest level of direct labor hours is in Month 4 with 4,500 hours, and the total cost is $12,000. The lowest level of direct labor hours is in Month 2 with 2,000 hours, and the total cost is $5,000. 
Using the formula: 
Variable cost per direct labor hour = (highest total cost - lowest total cost) / (highest level of activity - lowest level of activity) 
= ($12,000 - $5,000) / (4,500 - 2,000) 
= $2.08 
The fixed cost can be calculated by substituting the variable cost per direct labor hour in one of the equations, e.g. 
Total cost = Fixed cost + (Variable cost per direct labor hour x Direct labor hours) 
$5,000 = Fixed cost + ($2.08 x 2,000) 
Fixed cost = $5,000 - $4,160 
Fixed cost = $840 
Therefore, the cost formula for estimating costs is: 
Total cost = $840 + ($2.08 x Direct labor hours) 
or 
Total cost = $7,500 + ($2.08 x Direct labor hours)

Figure 3-5 Longberry Corporation Manufactures and Sells Party Items. the Following Representative