Answer the following questions using the information below:
The Ranger Company uses the high-low method to estimate it's cost function. The information for 2011 is provided below:

-What is the estimate of the total cost when 1,100 machine-hours are used?
A)$250,000
B)$270,000
C)$300,000
D)$400,000

Question

Answer the following questions using the information below:
The Ranger Company uses the high-low method to estimate it's cost function. The information for 2011 is provided below:
 
-What is the estimate of the total cost when 1,100 machine-hours are used?
A)$250,000 
B)$270,000 
C)$300,000 
D)$400,000

Quizplus · Accepted Answer

Using the high-low method, we can calculate the variable cost per machine-hour as follows: 
Variable Cost = (High Cost - Low Cost) / (High Activity - Low Activity) 
Variable Cost = ($310,000 - $190,000) / (4,000 - 2,000) = $60 per machine-hour

Next, we can use the variable cost and either the high or low cost data to calculate the fixed cost. 
Fixed Cost = Total Cost - (Variable Cost x Total Activity)

Using the high or low cost data: 
$310,000 = Fixed Cost + ($60 x 4,000)
Fixed Cost = $50,000

Therefore, the cost function for the Ranger Company is: 
Total Cost = $50,000 + ($60 x Machine-Hours)

To estimate total cost when 1,100 machine-hours are used: 
Total Cost = $50,000 + ($60 x 1,100) = $116,000

So, the estimate of the total cost is $270,000 (Option B) is incorrect.

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