Hook 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

Hook 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, we need to find the highest and lowest values of cost and corresponding activity levels. From the data given, the high cost is $2,700 at an activity level of 1800, and the low cost is $1,800 at an activity level of 1200.

Using this information, we can calculate the variable cost per unit using the formula:

Variable cost per unit = (High cost - Low cost) / (High activity level - Low activity level)
Variable cost per unit = ($2,700 - $1,800) / (1800 - 1200) = $0.60

Now, we need to substitute the variable cost per unit and either the high or low cost and activity level into the equation:

Y = Fixed cost + (Variable cost per unit x X)

Substituting using the high cost and activity level:

$2,700 = Fixed cost + ($0.60 x 1800)
Fixed cost = $1,800

The best equation is thus:

Y = $1,800 + ($0.60 x X)

This equation matches with choice C.

Hook Company Wants to Develop a Cost Estimating Equation for Its