Figure 3-11. The following four months of data were collected on utility cost and the number of labor hours in a factory.
Refer to Figure 3-11.Using the high-low method,compute the fixed cost of electricity.
A)$13,740
B)$10,860
C)$6,400
D)none of these are correct

Question

Figure 3-11. The following four months of data were collected on utility cost and the number of labor hours in a factory.
 Refer to Figure 3-11.Using the high-low method,compute the fixed cost of electricity.
A)$13,740 
B)$10,860 
C)$6,400 
D)none of these are correct

Quizplus · Accepted Answer

First, we need to identify the highest and lowest data points in terms of labor hours. Looking at the table, we see that the highest labor hours is 2,500 in May and the lowest labor hours is 1,500 in August.

Using this information, we can calculate the variable cost per labor hour:
Variable cost = (Total cost at 2,500 labor hours - Total cost at 1,500 labor hours) / (2,500 labor hours - 1,500 labor hours)
Variable cost = ($32,400 - $20,400) / (2,500 - 1,500)
Variable cost = $12 per labor hour

Next, we can use one of the data points (either the highest or lowest) and the variable cost per labor hour to calculate the fixed cost. Let's use the highest data point (2,500 labor hours in May):

Total cost = Fixed cost + Variable cost * Labor hours
$32,400 = Fixed cost + $12 * 2,500
Fixed cost = $13,740

Therefore, the fixed cost of electricity using the high-low method is $13,740. Option A is the correct choice.