Problem

High-Low Method

North Manchester Foundry produced 55,000 tons of steel in March at a cost of £1,150,000. In April, the
foundry produced 35,000 tons at a cost of £950,000. Using only these two data points, determine the cost
function for North Manchester.

Step-by-step solution
1. Step 1 of 4

Linear cost function: It is a cost function which denotes that cost will increase in parallel with the
number of units. Variable cost per unit and total fixed cost will remain same at all the respective
level of production. The cost function is expressed as given below:

2. Step 2 of 4

Determine variable cost per unit using linear cost function.

The variable cost per ton is £10.

3. Step 3 of 4

Fixed Cost
 Or

Fixed cost in both the cases would be £600,000.

4. Step 4 of 4

Depending upon the values of the variable and fixed cost as calculated above the cost function
would be:

Cost Function for NM would be:

Where £600,000 is the fixed cost

£10 is the variable cost per ton

Thus, cost function for company NM is