The following data pertains to activity and utility costs for two recent years:
Using the high-low method, the cost formula for utilities is:
A) $1.50 per unit
B) $8,000 plus $0.50 per unit
C) $1.25 per unit
D) $6,000 plus $0.75 per unit

Question

The following data pertains to activity and utility costs for two recent years: 
Using the high-low method, the cost formula for utilities is:
A) $1.50 per unit 
B) $8,000 plus $0.50 per unit 
C) $1.25 per unit 
D) $6,000 plus $0.75 per unit

Quizplus · Accepted Answer

To use the high-low method, we need to find the highest and lowest level of activity and the corresponding total cost. The data is as follows:

Year 1: 
Activity level = 8,000 units 
Total cost = $6,000

Year 2: 
Activity level = 12,000 units 
Total cost = $9,000

Using the formula:
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)
= ($9,000 - $6,000) / (12,000 units - 8,000 units)
= $0.75 per unit

We can now substitute the variable cost per unit into the total cost formula:
Total cost = Fixed cost + Variable cost per unit * Activity level

Using the data for Year 1:
Total cost = Fixed cost + ($0.75 per unit * 8,000 units)
$6,000 = Fixed cost + ($0.75 per unit * 8,000 units)
$6,000 = Fixed cost + $6,000
Fixed cost = $0

So the cost formula for utilities is:
Total cost = $6,000 + ($0.75 per unit * Activity level)
or
Total cost = $6,000 plus $0.75 per unit. Therefore, the correct answer is D.

The Following Data Pertains to Activity and Utility Costs for Two