Sterling Glass Company uses the high-low method to analyze mixed costs. The following information relates to the production data for the first six months of the year.How should the cost function be properly stated?
A) Y = $2,025 + $2.50H.
B) Y = $3,890 + $2.00H.
C) Y = $4,085 + $2.00H.
D) Y = $5,260 + $2.50H.

Question

Sterling Glass Company uses the high-low method to analyze mixed costs. The following information relates to the production data for the first six months of the year.How should the cost function be properly stated?
A) Y = $2,025 + $2.50H. 
B) Y = $3,890 + $2.00H. 
C) Y = $4,085 + $2.00H. 
D) Y = $5,260 + $2.50H.

Quizplus · Accepted Answer

Using the high-low method, we first need to determine the variable cost per unit:
Variable cost per unit = (High cost - Low cost) / (High activity level - Low activity level)
Variable cost per unit = ($6,600 - $4,200) / (9,000 - 6,000) = $2.00
Next, we can calculate the fixed cost using either the high or low data points:
Using the high point:
$6,600 = $2.00(9,000) + Fixed cost
Fixed cost = $4,080
Using the low point:
$4,200 = $2.00(6,000) + Fixed cost
Fixed cost = $2,160
Since these two calculations give different fixed cost amounts, we need to choose the one that makes more sense. In this case, $2,160 seems unreasonably low for a six-month fixed cost. Therefore, we will use the high point calculation:
Y = Fixed cost + (Variable cost per unit x Activity level)
Y = $4,080 + ($2.00 x H)
Y = $4,080 + $2.00H
Therefore, the best choice is C.

Sterling Glass Company Uses the High-Low Method to Analyze Mixed