Question

Electrical costs at one of Finfrock Corporation's factories are listed below: March April May June July August September October November Machine- Hours 3,642 3,616 3,667 3,634 3,665 3,659 3,644 3,612 3,624 Electrical Cost $ 40,537 $ 40,319 $ 40,706 $ 40,462 $ 40,703 $ 40, 680 $ 40,547 $ 40,268 $ 40,364 Management believes that electrical cost is a mixed cost that depends on machine hours. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first, founding off to the nearest whole cent. Then compute the foxed component, rounding off to the nearest whole dollar. Those estimates are closest to (Round your intermediate calculations to 2 decimal places.)

Answer 1

Variable cost per machine hour = (Highest activity cost – Lowest activity cost)/(Highest activity machine hour – Lowest activity machine hour)

= (40,706 - 40,268)/(3,667 - 3,612)

= 438/55

= $7.96

Fixed cost = Highest activity cost – (Variable cost per machine hour x Highest activity machine hour)

= 40,706 - (7.96 x 3,667)

= 40,706 - 29,189.32

= $11,517

First option is correct