At the high level of activity in November 7000 machine hours were run and power costs were $18000. In April a month of low activity 2000 machine hours were run and power costs amounted to $9000. Using the high-low method the estimated fixed cost element of power costs is
A) $18000.
B) $9000.
C) $5400.
D) $12600.

Question

Quizplus · Accepted Answer

Using the high-low method, we first need to calculate the variable cost per machine hour:

Variable cost per machine hour = (cost at high activity level - cost at low activity level) / (machine hours at high activity level - machine hours at low activity level)
                                  = ($18,000 - $9,000) / (7,000 - 2,000)
                                  = $1.50

Next, we can use either the high or low activity level to calculate the fixed cost element:

Fixed cost element = total cost - (variable cost per machine hour x total machine hours)
                   = $18,000 - ($1.50 x 7,000)
                   = $5,400

Therefore, the estimated fixed cost element of power costs is $5,400 (choice C).

At the High Level of Activity in November 7000 Machine