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    Unifying Concepts: High-Low Method, Scatterplot, and Least Squares Methods

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    You have been hired as a consultant for Jones Inc. The company manufactures high-density compact disks and sells them to a wide variety of business clients.
    Management is eager to learn more about the company's cost behavior. You have been provided the following data. Assume all production falls within the relevant range.


    Month Machine Hours Utility Costs
    January 290 $10,700
    February 280 10,400
    March 320 11,600
    April 340 12,100
    May 350 12,400
    June 290 10,750
    July 300 10,800
    August 300 10,900
    September 310 11,200
    October 340 12,200
    November 290 10,600
    December 310 11,000

    1. Using the high-low method, compute the variable and fixed elements of Jones' utility costs.
    2. Plot the information on a scattergraph. Based on your graph, determine the unit variable cost and monthly fixed costs.
    3. Using the least squares method (either the equation approach or a software package), calculate the variable and fixed cost components. Determine the cost formula.
    4. Interpretive Question: Why are the variable cost per unit and fixed costs different for each of these methods of analysis? Which method is the most accurate for determining variable and fixed cost components?

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    Solution Preview

    a. High-Low Method:

    High level Low level Change
    Machine Hours 350 280 70
    Cost 12400 10400 2000

    Variable cost = Change in cost / Change in Machine hours = 2000/70 = 28.5714

    Total cost at high level = 12400
    Total variable cost = Machine hours * variable cost = 350*28.5714 = 9999.99

    Fixed Cost = Total cost at high level - Total variable cost
    = 12400 - 9999.99 = 2400.01

    b. Scatter Plot:

    The fixed cost is at 10000. The variable cost for each level of ...

    Solution Summary

    High-Low Method, Scatterplot, and Least-Squares Methods are investigated.