The following data pertains to activity and maintenance costs for two recent years:$\begin{array}{lrr}
& \text { Year } 2& \text { Year } 1 \
\text {Activity level in units } &12,000&8,000\
\text {Maintenance cost } &£ 15,000 &£ 12,000\
\end{array}$

Using the high-low method, the cost formula for maintenance would be:

A)£1.50 per unit.
B)£1.25 per unit.
C)£3,000 plus £1.50 per unit.
D)£6,000 plus £0.75 per unit.

Question

The following data pertains to activity and maintenance costs for two recent years:$\begin{array}{lrr}
& \text { Year } 2& \text { Year } 1 \
  \text {Activity level in units  } &12,000&8,000\
 \text {Maintenance cost  } &£ 15,000 &£ 12,000\
\end{array}$

Using the high-low method, the cost formula for maintenance would be:

A)£1.50 per unit.
B)£1.25 per unit.
C)£3,000 plus £1.50 per unit.
D)£6,000 plus £0.75 per unit.

Quizplus · Accepted Answer

The high-low method involves calculating the variable cost per unit using the highest and lowest activity levels. The difference in cost between the high and low levels is divided by the difference in activity levels. Variable cost per unit = (£15,000 - £12,000) / (12,000 - 8,000) = £3,000 / 4,000 = £0.75 per unit. To find the fixed cost, subtract the total variable cost at either activity level from the total cost at that level. Using the high level, fixed cost = £15,000 - (£0.75 * 12,000) = £15,000 - £9,000 = £6,000. Therefore, the cost formula is £6,000 plus £0.75 per unit.

The Following Data Pertains to Activity and Maintenance Costs for Two