The following data pertains to activity and utility costs for two recent years: $$\begin{array} { | l | l | l | }
\hline & \text { Year 2 } & \text { Year I } \
\hline \text { Activity level in units } & 10,000 & 6,000 \
\hline \text { Utilities cost observed } & \$ 12,000 & \$ 9,000 \
\hline
\end{array}$$ Using the high-low method, the cost formula for utilities is?
A)$4,500 plus $0.75 per unit.
B)$3,000 plus $3.00 per unit.
C)$1.20 per unit.
D)$1.50 per unit.

Question

The following data pertains to activity and utility costs for two recent years: $$\begin{array} { | l | l | l | } 
\hline & \text { Year 2 } & \text { Year I } \
\hline \text { Activity level in units } & 10,000 & 6,000 \
\hline \text { Utilities cost observed } & \$ 12,000 & \$ 9,000 \
\hline
\end{array}$$ Using the high-low method, the cost formula for utilities is?
A)$4,500 plus $0.75 per unit.
B)$3,000 plus $3.00 per unit.
C)$1.20 per unit.
D)$1.50 per unit.

Quizplus · Accepted Answer

The high-low method involves using the highest and lowest activity levels to estimate fixed and variable costs. The variable cost per unit is calculated by dividing the change in cost by the change in activity level. Here, the change in cost is $12,000 - $9,000 = $3,000, and the change in activity level is 10,000 - 6,000 = 4,000 units. Thus, the variable cost per unit is $3,000 / 4,000 = $0.75 per unit. To find the fixed cost, we can use either the high or low point. Using the high point: $12,000 = Fixed Cost + ($0.75 * 10,000). Solving for Fixed Cost gives $12,000 - $7,500 = $4,500. Therefore, the cost formula is $4,500 plus $0.75 per unit.

The Following Data Pertains to Activity and Utility Costs for Two