Question

25. The following costs are associated with ABC Laundry Service Incorporated: January February March April May Machine Hours 46,000 55,000 54.000 48,000 52,000 Electric Costs $73.400 86,000 75,500 73.040 82,300 . ABC expects to incur 40,000 machine hours in June. Using the high-low method, total electric costs are estimated to be: High cos June 40.000 a. $57,600 55,000 86,000 b. $56,000. Tothic 86.000 c. $64,400. Low 73,400 46,000 d. $65,000. change - 9,000 Chenge 12,600 55 cost / activity 2,60 / 9,000 = 1055,000

Answer 1

Under High low method,Consider the Highest and Lowest activity and then apply the following equation
Variable cost per machine hour=Change in Total electric costs/Change in machine hours
Fixed cost=Total electric costs-Total variable cost
Highest activity=55000 machine hours in February at $ 86000
Lowest activity=46000 machine hours in January at $ 73400
Variable cost per machine hour=(86000-73400)/(55000-46000)=12600/9000=$ 1.4 per machine hour
To find fixed cost, Apply variable cost per unit in Lowest activity or highest activity
Let's consider Lowest activity
Fixed cost=73400-(46000*1.4)=73400-64400=$ 9000
If expected machine hour is 40000,
Total electric cost=Fixed cost+(Machine hours*Variable cost per machine hour)=9000+(40000*1.4)=9000+56000=$ 65000
Answer is
d. $ 65000