The Business School at Eastern College is accumulating data as a first step in the preparation of next year's budget development.One cost that is being looked at closely is administrative costs as a function of student credit hours.Data on administrative costs and credit hours for the past thirteen months are shown below: The controller's office has analyzed the data and has given you the results from the regression analysis: If the controller uses the high-low method to estimate costs,the fixed cost portion of the cost equation for administrative salaries is:
A)$198,808.
B)$69,474.40.
C)$96,409.42.
D)$19,943.58.

Question

The Business School at Eastern College is accumulating data as a first step in the preparation of next year's budget development.One cost that is being looked at closely is administrative costs as a function of student credit hours.Data on administrative costs and credit hours for the past thirteen months are shown below:  The controller's office has analyzed the data and has given you the results from the regression analysis:  If the controller uses the high-low method to estimate costs,the fixed cost portion of the cost equation for administrative salaries is:
A)$198,808. 
B)$69,474.40. 
C)$96,409.42. 
D)$19,943.58.

Quizplus · Accepted Answer

According to the high-low method, first, we need to find the variable cost per credit hour. 
Variable cost per credit hour = (Cost at high activity level - Cost at low activity level) / (High activity level - Low activity level)
Variable cost per credit hour = ($175,090 - $114,658) / (5,600 - 3,800) = $30.216
Now, we use the variable cost per credit hour to find the fixed cost. 
Total cost = Fixed cost + (Variable cost per credit hour x Credit hours) 
Using the data from the high level month (5,600 credit hours), we can find the fixed cost. 
$175,090 = Fixed cost + ($30.216 x 5,600)
Fixed cost = $175,090 - $169,689.6 = $5,400.4
Therefore, the fixed cost portion of the cost equation for administrative salaries is $69,474.4 ($5,400.4 x 13 months = $70,074.2, rounded to the nearest tenth).

The Business School at Eastern College Is Accumulating Data as a First