Question

The following information is available for a company's utility cost for operating its machines over the last four months.

Month	Machine hours		Utility cost
January	990		$	5,540
February	1,890		$	7,080
March	2,580		$	9,000
April	690		$	3,330

Using the high-low method, the estimated total fixed cost for utilities is:

Answer 1

Solution : -

The highest activity for the utility of 2590 Machine hours at a cost of $9000 about occurred in March while April had the lowest activity level with only 690 Machine Hours at a cost of $3,330. The cost amounts adjacent to these activity levels will be used in the high-low method, even though these cost amounts are not necessarily the highest and lowest costs for the year.

We calculate the fixed costs using the following steps:

1. Calculate variable cost per unit using identified high and low activity levels

Variable Cost= (TCHA -TCLA )/(HAU-LAU)

Variable Cost= (9000-3330)/(2580-690)

Variable Cost =5670/1890

Variable Cost = $3 Per Hour

Where :

TCHA - Total Cost Of High Activity

TCLA - Total Cost Of Low Activity

HAU - Highest Activity Unit

LAU - Lowest Activity Unit

2. Calculation Of Fixed Cost -

To calculate the total fixed costs, plug either the high or low cost and the variable cost into the total cost formula:

Total Cost = (Variable Cost * Unit Produce ) + Total Fixed Cost

$9000 = ( 3* $2580 ) + Total Fixed Cost

Total Fixed Cost = $9000 - $7740

Total Fixed Cost = $1260

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