Home Remodeling Inc.recently obtained a short-term bank loan from City National Bank.The bank required that certain credit information and pro forma financial statements be maintained through the life of the loan.In order to prepare the pro forma statements,Home Remodeling must forecast total overhead cost.The actual machine hours and overhead cost are presented below for the past six months.
Using the high-low method,total monthly fixed overhead cost is calculated to be:

Question

Home Remodeling Inc.recently obtained a short-term bank loan from City National Bank.The bank required that certain credit information and pro forma financial statements be maintained through the life of the loan.In order to prepare the pro forma statements,Home Remodeling must forecast total overhead cost.The actual machine hours and overhead cost are presented below for the past six months. 
Using the high-low method,total monthly fixed overhead cost is calculated to be:

Quizplus · Accepted Answer

To calculate total monthly fixed overhead cost using the high-low method, we need to find the variable cost per machine hour and the fixed cost component.

First, we can calculate the variable cost per machine hour as follows:

Variable cost per machine hour = (Total overhead cost at highest activity level - Total overhead cost at lowest activity level) / (Total machine hours at highest activity level - Total machine hours at lowest activity level)
Variable cost per machine hour = ($4,444 - $2,778) / (1,500 - 1,000) = $1.33 per machine hour

Next, we can use either the highest or lowest activity level to calculate the fixed cost component. Let's use the highest activity level:

Total overhead cost at highest activity level = Variable cost per machine hour x Total machine hours at highest activity level + Fixed overhead cost
$4,444 = ($1.33 x 1,500) + Fixed overhead cost
Fixed overhead cost = $696

Therefore, the answer is B) $696.