The following data pertains to activity and utility costs for two recent years: Using the high-low method,the cost formula for utilities is?
A) $1.50 per unit.
B) $8,000 plus $0.50 per unit.
C) $1.25 per unit.
D) $6,000 plus $0.75 per unit.

Question

The following data pertains to activity and utility costs for two recent years:  Using the high-low method,the cost formula for utilities is?
A) $1.50 per unit. 
B) $8,000 plus $0.50 per unit. 
C) $1.25 per unit. 
D) $6,000 plus $0.75 per unit.

Quizplus · Accepted Answer

The high-low method involves finding the highest and lowest levels of activity and their corresponding costs, and using that information to calculate the variable cost per unit and the fixed cost component.

Highest activity level: 10,000 units ($28,000 in utility costs)
Lowest activity level: 5,000 units ($10,500 in utility costs)

Variable cost per unit = (highest cost - lowest cost) / (highest activity level - lowest activity level)
= ($28,000 - $10,500) / (10,000 units - 5,000 units)
= $3.50 per unit

Fixed cost component = highest cost - (variable cost per unit x highest activity level)
= $28,000 - ($3.50 x 10,000)
= $6,000

Therefore, the cost formula for utilities is:
Fixed cost of $6,000 plus variable cost of $0.75 per unit.
Option D is the only one that matches this formula.

The Following Data Pertains to Activity and Utility Costs for Two