Quantum Company uses the highminuslow method to estimate the cost function. The information for 2017 is provided below: Machineminushours Labor Costs Highest observation of cost driver 1 comma 000 $ 32 comma 000 Lowest observation of cost driver 200 $ 16 comma 000 What is the estimated cost function for the above data? A. y = 32 comma 000 + 32X B. y = 12 comma 000 + 20X C. y = 20 comma 000 + 80X D. y = 16 comma 000 + 40X

The correct option is B, y = 12 comma 000 + 20X

Explanation:

Total = fixed cost + (variable cost*X)

where X is quantity of items produced

Variable cost=Highest observation cost-lowest observation/highest machine hours-lowest machine hours

variable cost=$32,000-$16,000 / (1000-200) = $20

Substituting the variable cost in highest activity figures, we would arrive at fixed cost

$32000=fixed cost + ($20*1000)

$32000=fixed cost+$20,000

fixed cost=$32,000-$20,000=$12,000

The correct option is B, y=12,000+20X

The y stands for total cost