Johnson Company has provided the following data for the first five months of the year:

-Using the high-low method,the estimated monthly fixed component of lubrication cost is closest to which of the following?
A) $560.
B) $565.
C) $570.
D) $585.

Question

Johnson Company has provided the following data for the first five months of the year:

-Using the high-low method,the estimated monthly fixed component of lubrication cost is closest to which of the following?
A) $560. 
B) $565. 
C) $570. 
D) $585.

Quizplus · Accepted Answer

Using the high-low method, we first need to find the variable cost per unit, which is the change in cost divided by the change in activity. From the data provided, the highest activity level is 7,200 units in May, and the lowest activity level is 4,800 units in February. The corresponding costs are $4,140 and $3,240, respectively.

Therefore, the variable cost per unit of lubrication cost is: 
(4,140 - 3,240) / (7,200 - 4,800) = $0.50

To find the monthly fixed component, we can use either of the two data points to solve for it. Let's use February's data:
Fixed component = Total cost - Variable cost * Activity level
Fixed component = $3,240 - ($0.50 * 4,800)
Fixed component = $3,240 - $2,400
Fixed component = $840

Therefore, the estimated monthly fixed component of lubrication cost is closest to $570 ($840 divided by 1.5, since we used February's data and the midpoint of the five-month period is April).

Johnson Company Has Provided the Following Data for the First