ACC

Examples of High and Low method & Least-squares Regression

Example 1 High & Low

The administrator of company X would like a cost formula linking the costs involved in admitting patients to the number of patients admitted during a month. The admitting department’s costs and the number of patients admitted during the immediately preceding eight months are given in the following table:

Month	No of patents admitted	Admitting dept costs
May	1,800	14,700
June	1900	15,200
July	1,700	13,700
August	1,600	14,000
September	1,500	14,300
October	1,300	13,100
November	1,100	12,800
December	1,500	14,600

REQUIRED

1. Use the high-low method to establish the fixed and variable components of admitting costs

2. Express your findings in a cost formula

3. What will be the cost if there are 2000 patients admitted?

STEP 1 : Identify the periods of the lowest and highest activity

STEP 2: Compute the variable cost per unit using those two points

Month	No patients admitted	Admittance cost
High	1,900	15,200
Low	1,100	12800
Change	800	2400

Variable cost = Change in cost / change in activity= 2400/800 = $3 per patient admitted

Step 3 : compute the fixed cost

Fixed cost = Total cost – Variable cost

= 15200 – ( 3 x 1900)

= $9,500

Step 4 : cost formula

Y = bo + b1 (X)

Step 5

Y = 9500 + ( 3 x 2000) = $15,500