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

The high-low method uses the highest and lowest activity levels and their corresponding costs to estimate the fixed and variable components of a mixed cost. Using the data given, the highest activity level is 8,000 units in period 2 with a total cost of $8,400 and the lowest activity level is 4,000 units in period 1 with a total cost of $6,000.

Variable cost per unit = (cost at high activity level - cost at low activity level) / (activity at high level - activity at low level) 
Variable cost per unit = ($8,400 - $6,000) / (8,000 - 4,000) 
Variable cost per unit = $0.50

Fixed cost = total cost - (variable cost per unit x activity level) 
Using period 1 data: 
Fixed cost = $6,000 - ($0.50 x 4,000) 
Fixed cost = $4,000

Therefore, the cost formula for utility cost is: 
Y = $4,000 + $0.50 X

The Following Data Pertains to Activity and Utility Cost for Two