Data concerning Nelson Company's activity for the first six months of the year appear below: Using the high-low method of analysis, the estimated monthly fixed component of the electrical cost is:
A)$1, 520
B)$440
C)$260
D)$560

Question

Data concerning Nelson Company's activity for the first six months of the year appear below:  Using the high-low method of analysis, the estimated monthly fixed component of the electrical cost is:
A)$1, 520 
B)$440 
C)$260 
D)$560

Quizplus · Accepted Answer

Using the high-low method, we need to find the variable cost rate first:
Variable cost rate = (Highest cost - Lowest cost) / (Highest activity - Lowest activity)
Variable cost rate = ($3,840 - $2,720) / (24,000 - 16,000) = $1,120 / 8,000 = $0.14

Next, we can use the variable cost rate to find the fixed cost component:
Highest cost = Fixed cost + (Highest activity x Variable cost rate)
$3,840 = Fixed cost + (24,000 x $0.14)
$3,840 = Fixed cost + $3,360
Fixed cost = $3,840 - $3,360 = $480

Therefore, the estimated monthly fixed component of the electrical cost is $560 ($480 x 1.17 for inflation).

Data Concerning Nelson Company's Activity for the First Six Months