The Macon Company uses the high-low method to determine its cost equation.The following information was gathered for the past year:
$$\begin{array} { | l | r | r | }
\hline & \begin{array} { r }
\text { Machine } \
\text { Hours }
\end{array} & \begin{array} { r }
\text { Direct Labor } \
\text { Costs }
\end{array} \
\hline \text { Busiest month (June) } & 14,000 & \$ 200,000 \
\hline \begin{array} { l }
\text { Slowest month } \
\text { (December) }
\end{array} & 6,000 & \$ 120,000 \
\hline
\end{array}$$
If Macon expects to use 10,000 machine hours next month,what are the estimated direct labor costs?

A) $160,000.
B) $180,000.
C) $175,000.
D) $150,000.

Question

The Macon Company uses the high-low method to determine its cost equation.The following information was gathered for the past year: 
$$\begin{array} { | l | r | r | } 
\hline & \begin{array} { r } 
\text { Machine } \
\text { Hours }
\end{array} & \begin{array} { r } 
\text { Direct Labor } \
\text { Costs }
\end{array} \
\hline \text { Busiest month (June) } & 14,000 & \$ 200,000 \
\hline \begin{array} { l } 
\text { Slowest month } \
\text { (December) }
\end{array} & 6,000 & \$ 120,000 \
\hline
\end{array}$$
If Macon expects to use 10,000 machine hours next month,what are the estimated direct labor costs?

A) $160,000.
B) $180,000.
C) $175,000.
D) $150,000.

Quizplus · Accepted Answer

The high-low method calculates the variable cost per unit by dividing the difference in total cost between the highest and lowest activity levels by the difference in activity levels. The fixed cost is then calculated by subtracting the variable cost per unit from the total cost at the highest activity level.In this case, the variable cost per machine hour is ($200,000 - $120,000) / (14,000 - 6,000) = $5. The fixed cost is $200,000 - (5 * 14,000) = $20,000.Therefore, the estimated direct labor costs for 10,000 machine hours is (5 * 10,000) + 20,000 = $70,000.

The Macon Company Uses the High-Low Method to Determine Its