The cost formula is [tex]\ 30,000[/tex] per month plus 2 per unit processed. From the scattergraph it can be observed that when company applies the high-low method to know the slope of the regression line, the line will be too steep. It would cause in underestimating fixed costs and overestimation of the variable cost per unit.
Prepare scatter graph for processing cost at various levels of activity as follows:
The scatter diagram shows the processing cost at various level of activity during the 15 months. X-axis shows the units purchased and y-axis shows the processing cost. The processing cost range from $38,000 to $56,000 and units produced range from 4,500 units to 12,000 units.
Compute monthly fixed cost and variable cost per unit using quick and dirty method:
Cost behaviour is considered linear whenever a straight line is a reasonable approximation for the relation between cost and activity.
Fixed cost is a rough estimate which is $29,000.
Calculate the variable cost as follows:
variable cost per unit=$15,000/7,500
= $2
Therefore, linear equation is as follows:
Y=$29.000+2X
Here,
X=Units produced
Y=Processing cost
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