The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:

Machine-Hours Overhead Cost
January 150,000 $ 339,000
February 140,000 $ 328,000
March 160,000 $ 350,000
April 130,000 $ 319,500
May 170,000 $ 362,500
June 200,000 $ 400,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method?

Note: Round your intermediate calculations to 2 decimal places.

Question

The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:

Machine-Hours	Overhead Cost
January	150,000	$ 339,000
February	140,000	$ 328,000
March	160,000	$ 350,000
April	130,000	$ 319,500
May	170,000	$ 362,500
June	200,000	$ 400,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method?

Note: Round your intermediate calculations to 2 decimal places.

BlackTom AI · Accepted Answer

Using the high-low method to separate fixed and variable overhead, identify the highest and lowest activity months and compute variable cost per machine-hour, then estimate total cost for 185,000 hours.

1) Relevant knowledge points and concepts
- High-low method: uses the highest and lowest activity levels to estimate variable cost per unit = (Cost_high − Cost_low) / (Activity_high − Activity_low).
- Total cost = Fixed cost + (Variable cost per unit × Activity).
- Fixed cost is found by rearranging total cost formula at either high or low activity point.

2) Step-by-step reasoning and calculations
- Identify high and low activity:
  - Highest machine-hours: June = 200,000 hours, Overhead = $400,000
  - Lowest machine-hours: April = 130,000 hours, Overhead = $319,500
- Compute variable cost per machine-hour:
  - Difference in cost = $400,000 − $319,500 = $80,500
  - Difference in hours = 200,000 − 130,000 = 70,000 hours
  - Variable cost per hour = $80,500 / 70,000 = $1.15 (rounded to 2 decimal places)
- Compute fixed cost using low point (or high, same result):
  - Fixed = Total_cost_low − (Variable × Hours_low)
  - Fixed = $319,500 − ($1.15 × 130,000)
  - Variable portion = $1.15 × 130,000 = $149,500
  - Fixed = $319,500 − $149,500 = $170,000
- Estimate total overhead at 185,000 machine-hours:
  - Total = Fixed + (Variable × 185,000)
  - Variable portion = $1.15 × 185,000 = $212,750
  - Total = $170,000 + $212,750 = $382,750

3) Why the correct answer is correct
- The high-low calculations produce a consistent variable rate ($1.15/hr) and fixed cost ($170,000) that reproduce the observed high and low totals; applying them to 185,000 hours gives $382,750 exactly.

4) Why the other options are incorrect
- $212,750 equals only the variable portion (1.15 × 185,000), omitting fixed cost.
- $359,750 and $381,700 do not match the correct application of the high-low method; they reflect arithmetic or method errors (wrong high/low pairing or incorrect fixed/variable computations).

Conclusion: The estimated total overhead cost using the high-low method for 185,000 machine-hours is $382,750, which matches the provided correct answer.

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