Which statement is TRUE regarding the high-low method to approximate a linear cost function?
A) The second step in the high-low method is to plot the historical data points on a graph.
B) Outliers should not be removed from the analysis.
C) Draw a line through all the data points using judgment to fit the line as close as possible to all the plotted points.
D) The point at which the line intersects the Y-axis is the estimate of fixed costs.

Question

Quizplus · Accepted Answer

The high-low method involves selecting the highest and lowest levels of activity and their corresponding total costs to estimate the variable cost per unit and the fixed cost component of a linear cost function. The point where the line intersects the Y-axis represents the fixed cost estimate, which is why option D is correct. Option A is incorrect because plotting the data points is not necessary for the high-low method. Option B is incorrect because outliers should be removed from the analysis as they can skew the results. Option C is also incorrect because the line of best fit should be drawn using a mathematical formula rather than judgment to ensure accuracy.

Which Statement Is TRUE Regarding the High-Low Method to Approximate