Question

The following data pertains to activity and utility cost for two recent periods:

Activity level (units)	8,000	5,000
Utility cost	$8,000	$6,150

  
Utility cost is a mixed cost with both fixed and variable components. Using the high-low method, the cost formula for utility cost is:

Question 3 options:

	A) Y = $1.00 X
	B) Y = $3,064 + $0.61 X
	C) Y = $1.25 X
	D) Y = $1,500 + $1.25 X

Answer 1

Solution:

Calculation of Variable cost as per High Low method:

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 = $ 8,000   ; Cost at Lowest level of activity = $ 6,150

Units at Highest level of activity = 8,000     ;   Units at Lowest level of activity = 5,000

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

= ( $ 8,000 - $ 6,150 ) / ( 8,000 – 5,000 )

= $ 1,850 / $ 3,000

= $ 0.617 (when rounded off to three decimal places )

= $ 0.61 ( when rounded off to two decimal places )

Thus the variable cost per unit as per the high low method = $ 0.61

Calculation of Fixed cost as per High Low method :

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 = $ 8,000 – [ $ 0.617 * 8,000 ]

= $ 8,000 - $ 4,936

= $ 3,064

Thus the fixed cost as per the high low method = $ 3,064

Calculation of Utility cost as per High Low method :

We know that utility cost = Y = Fixed cost + ( Variable cost * Activity units )

As per the calculations above we have

Fixed Cost = $ 3,064 ;

Variable cost per unit = $ 0.61 ;

Let the Activity Units be “ X “ ;

Applying the above information in the utility cost equation we have utility cost as

Y = $ 3,064 + ( $ 0.61 * X )

Y = $ 3,064 + $ 0.61 X

Thus, using the high-low method, the cost formula for utility cost is = Y = $ 3,064 + $ 0.61 X

The solution is Option B) Y = $ 3,064 + $ 0.61 X