Hagler's Toupees has the following machine hours and production costs for the last six months of last year: If Hagler expects to incur 14,000 machine hours in January,what will be the estimated total production cost using the high-low method?
A)$8,750.00.
B)$11,142.50.
C)$22,400.00.
D)$10,889.10.

Question

Hagler's Toupees has the following machine hours and production costs for the last six months of last year:  If Hagler expects to incur 14,000 machine hours in January,what will be the estimated total production cost using the high-low method?
A)$8,750.00. 
B)$11,142.50. 
C)$22,400.00. 
D)$10,889.10.

Quizplus · Accepted Answer

First, we need to use the data provided to calculate the variable cost per machine hour:
Variable cost per machine hour = (Cost at High Activity Level - Cost at Low Activity Level) / (High Activity Level - Low Activity Level)
Variable cost per machine hour = (12,450 - 10,290) / (1,600 - 800) = 2,580 / 800 = 3.225
Then, we can use this variable cost per machine hour to calculate the estimated total production cost for January:
Estimated total production cost = Fixed Cost + (Variable Cost per Machine Hour x Machine Hours)
Using the highest level of machine hours (1,600) and the corresponding production cost ($12,450) as the high activity level:
12,450 = Fixed Cost + (3.225 x 1,600)
Fixed Cost = 12,450 - (3.225 x 1,600) = 7,560
Therefore, the equation for estimating total production cost is:
Estimated total production cost = 7,560 + (3.225 x Machine Hours)
Plugging in 14,000 machine hours for January:
Estimated total production cost = 7,560 + (3.225 x 14,000) = $11,142.50.

Hagler's Toupees Has the Following Machine Hours and Production Costs