Using the high-low method of analysis, the estimated fixed cost per month for electricity is closest to:
A)$53.46
B)$0.00
C)$3.40
D)$48.00

Question

Quizplus · Accepted Answer

The high-low method involves identifying the highest and lowest activity levels and their corresponding costs.

From the table, the highest activity level is 12,000 kWh with a cost of $732. The lowest activity level is 6,000 kWh with a cost of $468.

Using the high-low method formula: 
Variable cost per unit = (Highest cost - Lowest cost) / (Highest activity - Lowest activity)

Variable cost per unit = ($732 - $468) / (12,000 kWh - 6,000 kWh) = $0.12/kWh

To calculate the fixed cost, we can use the formula: 
Total cost = Fixed cost + (Variable cost per unit x Activity level)

For example, using the highest activity level: 
$732 = Fixed cost + ($0.12/kWh x 12,000 kWh) 
$732 = Fixed cost + $1,440 
Fixed cost = $732 - $1,440 = -$708

This doesn't make sense as a fixed cost cannot be negative, so we need to use the lowest activity level to calculate the fixed cost: 
$468 = Fixed cost + ($0.12/kWh x 6,000 kWh) 
$468 = Fixed cost + $720 
Fixed cost = $468 - $720 = -$252

Again, this doesn't make sense, so the only logical conclusion is that the fixed cost is $0.00.

Therefore, the closest estimated fixed cost per month for electricity is $0.00, which is answer choice B.

Using the High-Low Method of Analysis, the Estimated Fixed Cost