Question

The following information is available for a company's utility cost for operating its machines over the last four months.

Month	Machine hours		Utility cost
January	900		$	5,450
February	1,800		$	6,900
March	2,400		$	8,100
April	600		$	3,600

Using the high-low method, the estimated total fixed cost for utilities is:

Multiple Choice

• $1,500.

• $3,600.

• $6,000.

• $3,300.

• $2,100.

Answer 1

Solution:

The formula for calculating the variable cost per unit as per the high low method

= ( Cost at Highest level of activity - Cost at Lowest level of activity ) / ( Units at Highest level of activity - Units at Lowest level of activity )

As per the information given in the question we have

Cost at Highest level of activity = $ 8,100   ; Cost at Lowest level of activity = $ 3,600

Units at Highest level of activity = 2,400   ;   Units at Lowest level of activity = 600

Applying the above information in the formula for variable cost per unit we have

= ( $ 8,100 - $ 3,600 ) / ( 2,400 – 600 )

= $ 4,500 / $ 1,800

= $ 2.50

Thus the variable cost per unit as per the high low method = $ 2.50

The formula for calculating the Fixed cost as per the high low method is

= Cost at Highest level of activity – [ Variable cost per unit * Units at Highest level of activity ]

Applying the information available we have

Fixed costs = $ 8,100 – [ $ 2.50 * 2,400 ]

= $ 8,100 - $ 6,000

= $ 2,100

Thus as per the high low method the estimated total fixed cost for utilities is= $ 2,100

The solution is Option 5 = $ 2,100