Glatt Inc., an escrow agent, has provided the following data concerning its office expenses:
Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.
-Using the high-low method,the estimate of the fixed component of office expense per month is closest to:
A)$6,692
B)$8,064
C)$7,376
D)$7,720

Question

Glatt Inc., an escrow agent, has provided the following data concerning its office expenses:   
Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.
-Using the high-low method,the estimate of the fixed component of office expense per month is closest to:
A)$6,692 
B)$8,064 
C)$7,376 
D)$7,720

Quizplus · Accepted Answer

The fixed component of office expense per month is closest to $6,692. This is because the high-low method calculates the fixed component by taking the difference between the highest and lowest total expenses and dividing by the difference between the highest and lowest activity levels. In this case, the highest total expense is $10,000 and the lowest total expense is $5,000. The highest activity level is 1,000 units and the lowest activity level is 500 units. Therefore, the fixed component of office expense per month is ($10,000 - $5,000) / (1,000 - 500) = $5,000 / 500 = $10 per unit. Multiplying this by the average activity level of 700 units gives a fixed component of $7,000.

Glatt Inc, an Escrow Agent, Has Provided the Following Data Concerning