The following data pertain to activity and utilities costs for two recent years:
$\begin{array}{|l|r|r|}
\hline & \text { Year 2 } & \text { Year 1 } \
\hline \text { Activity Level in Units } & 10,000 & 6,000 \
\hline \text { Utilities Cost } & \$ 12,000 & \$ 9,000 \
\hline
\end{array}$
Using the high-low method,what is the cost formula for utilities?
A) $1.20 per unit.
B) $1.50 per unit.
C) $3,000 plus $3.00 per unit.
D) $4,500 plus $0.75 per unit.

Question

Quizplus · Accepted Answer

The high-low method involves taking the highest and lowest activity levels and their corresponding costs to determine the variable cost per unit and the fixed cost. The variable cost per unit is calculated by dividing the difference in costs by the difference in activity levels. For the given data: Variable cost per unit = $(\$12,000 - \$9,000) / (10,000 - 6,000) = \$3,000 / 4,000 = \$0.75$ per unit. To find the fixed cost, we use one of the points (e.g., Year 2 data): Fixed cost = Total cost - (Variable cost per unit * Activity level) = \$12,000 - (\$0.75 * 10,000) = \$12,000 - \$7,500 = \$4,500. Therefore, the cost formula is \$4,500 plus \$0.75 per unit.

The Following Data Pertain to Activity and Utilities Costs for Two