The formulas used in the high-low method are:
\[ \text{Variable Cost per Unit} = \frac{\text{Highest Activity Cost} - \text{Lowest Activity Cost}}{\text{Highest Activity Units} - \text{Lowest Activity Units}} \]
\[ \text{Fixed Cost} = \text{Highest Activity Cost} - (\text{Variable Cost per Unit} \times \text{Highest Activity Units}) \]
\[ \text{Total Cost} = \text{Fixed Cost} + (\text{Variable Cost per Unit} \times \text{New Activity Units}) \]
The high-low method is a cost estimation technique used to separate fixed and variable costs based on the highest and lowest activity levels. It helps in determining the cost behavior and projecting future costs.
Let's consider a company with the following data:
Step-by-step calculation:
\[ \text{Variable Cost per Unit} = \frac{\$540,000 - \$315,000}{18,000 - 10,000} = \$28.13 \text{ per hour} \]
\[ \text{Fixed Cost} = \$540,000 - (\$28.13 \times 18,000) = \$33,750 \]
\[ \text{Total Cost for 20,000 hours} = \$33,750 + (\$28.13 \times 20,000) = \$596,350 \]