Farnor, Inc., would like to estimate the variable and fixed components of its electrical costs and has compiled the following data for the last four months of operations. Using the high-low method of analysis, the estimated fixed cost per month for electricity is closest to:
A)$53.46
B)$0.00
C)$3.40
D)$48.00

Question

Farnor, Inc., would like to estimate the variable and fixed components of its electrical costs and has compiled the following data for the last four months of operations.  Using the high-low method of analysis, the estimated fixed cost per month for electricity is closest to:
A)$53.46 
B)$0.00 
C)$3.40 
D)$48.00

Quizplus · Accepted Answer

Using the high-low method, we need to calculate the variable cost per unit first.

The highest level of activity is in month 4 with 14,000 units and the lowest level of activity is in month 2 with 8,000 units.

Variable cost per unit = (Total cost at highest level of activity - Total cost at lowest level of activity) / (Highest level of activity - Lowest level of activity)

Variable cost per unit = ($766.70 - $480.40) / (14,000 - 8,000)

Variable cost per unit = $4.55

Next, we need to calculate the estimated fixed cost by using either the high activity level or the low activity level.

Using the high activity level:

Total cost = Variable cost per unit x High activity level + Fixed cost

$766.70 = $4.55 x 14,000 + Fixed cost

Fixed cost = $48.00

Therefore, the estimated fixed cost per month for electricity is closest to $48.00.

The correct answer is D.