At the high level of activity in November, 7,000 machine hours were run and power costs were $12,000. In April, a month of low activity, 2,000 machine hours were run and power costs amounted to $6,000. Using the high-low method, the estimated fixed cost element of power costs is
A) $12,000.
B) $6,000.
C) $3,600.
D) $8,400.

Question

Quizplus · Accepted Answer

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

Variable cost = (Cost at high level of activity - Cost at low level of activity) / (Machine hours at high level of activity - Machine hours at low level of activity)

Variable cost = ($12,000 - $6,000) / (7,000 - 2,000)

Variable cost = $6,000 / 5,000 = $1.20 per machine hour

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

Fixed cost = Total cost - (Variable cost per machine hour x Total machine hours)

Using the data from the high level of activity:

Fixed cost = $12,000 - ($1.20 x 7,000)

Fixed cost = $12,000 - $8,400

Fixed cost = $3,600

Therefore, the estimated fixed cost element of power costs is $3,600.

At the High Level of Activity in November, 7,000 Machine