The following data pertains to activity and utility cost for two recent periods: Utility cost is a mixed cost with both fixed and variable components.Using the high-low method,the cost formula for utility cost is:
A)Y = $1.00 X
B)Y = $1.25 X
C)Y = $4,000 + $0.50 X
D)Y = $1,500 + $1.25 X

Question

The following data pertains to activity and utility cost for two recent periods:  Utility cost is a mixed cost with both fixed and variable components.Using the high-low method,the cost formula for utility cost is:
A)Y = $1.00 X 
B)Y = $1.25 X 
C)Y = $4,000 + $0.50 X 
D)Y = $1,500 + $1.25 X

Quizplus · Accepted Answer

To use the high-low method, we need to identify the highest and lowest activity levels and their corresponding costs.

Highest activity level: 40,000 units (in Period 2) with a cost of $24,000 
Lowest activity level: 20,000 units (in Period 1) with a cost of $20,000

Using this information, we can calculate the variable cost per unit:

Variable cost per unit = (Highest cost - Lowest cost) / (Highest activity level - Lowest activity level) 
= ($24,000 - $20,000) / (40,000 - 20,000) 
= $4,000 / 20,000 
= $0.20 per unit

Now that we have the variable cost per unit, we can use either the highest or lowest activity level and cost to calculate the fixed cost:

Fixed cost = Total cost - (Variable cost per unit x Total units)

Using the lowest activity level: 
$20,000 = Total cost - ($0.20 x 20,000) 
Total cost = $24,000

Using the highest activity level: 
$24,000 = Total cost - ($0.20 x 40,000) 
Total cost = $32,000

We choose the calculation using the lowest activity level as it has lower rounding errors.

Therefore, the cost formula for utility cost is: 
Y = $4,000 + $0.50X (where X is the activity level)

The Following Data Pertains to Activity and Utility Cost for Two