The following data pertain to activity and utilities costs for two recent years:
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.FC = 12,000 - 10,000 * .75 = $4,500.

Question

The following data pertain to activity and utilities costs for two recent years: 
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.FC = 12,000 - 10,000 * .75 = $4,500.

Quizplus · Accepted Answer

The high-low method involves finding the highest and lowest activity levels and their corresponding costs, and using this information to calculate the variable cost per unit and the fixed cost. In this case, the highest activity level is 10,000 units with a total cost of $9,000 and the lowest activity level is 6,000 units with a total cost of $6,000. Using this information, we can calculate the variable cost per unit as follows:

Variable Cost Per Unit = (Highest Cost - Lowest Cost) / (Highest Activity Level - Lowest Activity Level) 
Variable Cost Per Unit = ($9,000 - $6,000) / (10,000 - 6,000) 
Variable Cost Per Unit = $3,000 / 4,000 
Variable Cost Per Unit = $0.75

Once we have the variable cost per unit, we can use either the highest or lowest activity level and costs to calculate the fixed cost. If we use the highest activity level, the calculation would be:

Fixed Cost = Highest Cost - (Variable Cost Per Unit x Highest Activity Level) 
Fixed Cost = $9,000 - ($0.75 x 10,000) 
Fixed Cost = $9,000 - $7,500 
Fixed Cost = $1,500

Therefore, the cost formula for utilities is:

Total Cost = $1,500 + ($0.75 x Number of Units) 
Or, simplified: 
Total Cost = $4,500 + ($0.75 x Number of Units)

The Following Data Pertain to Activity and Utilities Costs for Two