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

Using the high-low method, we first need to identify the highest and lowest levels of activity and their respective utility costs:
Highest level of activity: 10,000 units, Utility cost: $8,000
Lowest level of activity: 6,000 units, Utility cost: $5,000

Then, we can calculate the variable cost per unit:
Variable cost per unit = (highest cost - lowest cost) / (highest activity - lowest activity)
= ($8,000 - $5,000) / (10,000 - 6,000)
= $0.50 per unit

Finally, we can use the variable cost per unit and any of the data points to calculate the fixed cost:
Fixed cost = Total cost - (Variable cost per unit x Activity level)
= $8,000 - ($0.50 x 10,000)
= $8,000 - $5,000
= $3,000

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

The Following Data Pertains to Activity and Utility Cost for Two