The following data pertain to activity and utilities costs for two recent years:

Using the high-low method,what is the cost formula for utilities?
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 pertain to activity and utilities costs for two recent years:

Using the high-low method,what is the cost formula for utilities?
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 use the high-low method, we first need to identify the highest and lowest activity levels and their corresponding costs. From the data given, the highest activity level is 10,000 units with a corresponding utility cost of $9,000, and the lowest activity level is 5,000 units with a corresponding utility cost of $4,500.

Using these two data points, we can calculate the variable cost per unit:

Variable cost per unit = (High cost – Low cost) ÷ (High activity – Low activity)
Variable cost per unit = ($9,000 – $4,500) ÷ (10,000 – 5,000)
Variable cost per unit = $0.75 per unit

To calculate the fixed cost component, we can use either the high or low activity level and their corresponding costs, and solve for the fixed cost:

Fixed cost = Total cost – Variable cost component x Total activity level
Fixed cost = $9,000 – ($0.75 x 10,000)
Fixed cost = $4,500

Therefore, the cost formula for utilities is:

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

Choice D is the best answer because it correctly represents the cost formula for utilities based on the high-low method.

The Following Data Pertain to Activity and Utilities Costs for Two