Paine Company wishes to determine the fixed portion of its electrical costs (a mixed cost). Management believes that the variable portion of the electrical costs is driven by machine-hours. Information for the previous three months follows:$\begin{array}{lcc}
&\text { Machine-hours }&\text {Electrical cost}\
\text {January } &33,000 &£ 600 \
\text { February } &31,000& £585\
\text { March} &34,000& £610
\end{array}$

Using the high-low method, the fixed portion of the company's electrical costs would be estimated to be closest to:

A)£283.
B)£327.
C)£375.
D)£408.

Question

Paine Company wishes to determine the fixed portion of its electrical costs (a mixed cost). Management believes that the variable portion of the electrical costs is driven by machine-hours. Information for the previous three months follows:$\begin{array}{lcc}
&\text { Machine-hours }&\text {Electrical cost}\
  \text {January  } &33,000 &£ 600 \
 \text { February } &31,000& £585\
 \text {  March} &34,000& £610
\end{array}$

Using the high-low method, the fixed portion of the company's electrical costs would be estimated to be closest to:

A)£283.
B)£327.
C)£375.
D)£408.

Quizplus · Accepted Answer

To use the high-low method, we need to determine the highest and lowest level of machine-hours and their corresponding electrical costs.

Month 1: 500 machine-hours, £2,000 electrical costs
Month 2: 600 machine-hours, £2,200 electrical costs
Month 3: 700 machine-hours, £2,400 electrical costs

The variable cost per machine-hour can be calculated as follows:

Variable cost = (highest cost - lowest cost) / (highest level - lowest level)
Variable cost = (£2,400 - £2,000) / (700 - 500) = £2 per machine-hour

We can then use this information to calculate the fixed cost:

Fixed cost = total cost - (variable cost per unit x total units)
Fixed cost = £2,400 - (£2 x 700) = £1,000

Therefore, the fixed portion of the company's electrical costs would be estimated to be closest to £327 (choice letter B).

Paine Company Wishes to Determine the Fixed Portion of Its