The following data pertains to activity and utility costs for two recent years: Using the high-low method,the cost formula for utilities is?
A) $1.20 per unit.
B) $1.50 per unit.
C) $3,000 plus $3.00 per unit.
D) $4,500 plus $0.75 per unit.

Question

The following data pertains to activity and utility costs for two recent years:  Using the high-low method,the cost formula for utilities is?
A) $1.20 per unit. 
B) $1.50 per unit. 
C) $3,000 plus $3.00 per unit. 
D) $4,500 plus $0.75 per unit.

Quizplus · Accepted Answer

To calculate the cost formula for utilities using the high-low method, we need to identify the highest and lowest levels of activity and the corresponding total costs.

From the data, we can see that:

- For Year 1: 
    - Highest level of activity = 10,000 units 
    - Total cost for utilities = $10,500
    - Lowest level of activity = 6,000 units 
    - Total cost for utilities = $9,000

- For Year 2: 
    - Highest level of activity = 12,000 units 
    - Total cost for utilities = $12,000
    - Lowest level of activity = 8,000 units 
    - Total cost for utilities = $10,500

Using the high-low method, we can calculate the variable cost per unit as:

Variable cost per unit = (Total cost at highest level of activity - Total cost at lowest level of activity) / (Number of units at highest level of activity - Number of units at lowest level of activity)

For the utilities costs, this would be:

Variable cost per unit = ($12,000 - $9,000) / (10,000 - 6,000) = $0.75 per unit

To determine the fixed cost component of the cost formula, we can use either the total cost at the highest or lowest level of activity and subtract the variable cost component:

Fixed cost = Total cost - (Variable cost per unit x Number of units)

Using the highest level of activity (12,000 units) and the variable cost per unit ($0.75), we get:

Fixed cost = $12,000 - ($0.75 x 12,000) = $4,500

Therefore, the cost formula for utilities using the high-low method is:

Total cost = $4,500 + ($0.75 x Number of units)

The best choice is D, $4,500 plus $0.75 per unit.

The Following Data Pertains to Activity and Utility Costs for Two