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Mawson Lumber uses the high­–low method to estimate electricity cost, which varies in relation to machine hours. Based on the following data, how would the cost function be stated if ‘X' is the number of machine hours? Electricity expense Machine hours June $495 410 July $500 400 August $750 900 September $610 500 Group of answer choices $525 + $0.35 X $300 + $0.50 X $500 + $0.50 X $470 + $0.35 X

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Answer:

Part 1

The electricity cost, which varies in relation to machine hours is $0.50

Part 2

The Cost function will be :

$300 + $0.50 X

Explanation:

High-low method is used to separate the variable and fixed cost element of a mixed cost or semi variable expense.

Step 1 : Determine the variable cost

Variable Cost = ($750 - $500) ÷ (900 - 400)

                       = $0.50

Step 2 : Determine the fixed cost

Total Cost = Variable Cost + Fixed Cost

hence,

Fixed Cost = Total Cost - Variable Cost

using the high point to substitute in the formulae we get :

Fixed Cost = $750 - ($0.50 x 900)

                  = $300

thus,

Total Cost = $300 + $0.50 x

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