Farnor,Inc. ,would like to estimate the variable and fixed components of its electrical costs and has compiled the following data for the last four months of operations. Using the high-low method of analysis,the estimated fixed cost per month for electricity is closest to:
A)$53.46
B)$0.00
C)$3.40
D)$48.00

Question

Farnor,Inc. ,would like to estimate the variable and fixed components of its electrical costs and has compiled the following data for the last four months of operations.  Using the high-low method of analysis,the estimated fixed cost per month for electricity is closest to:
A)$53.46 
B)$0.00 
C)$3.40 
D)$48.00

Quizplus · Accepted Answer

Using the high-low method, we first need to determine the variable cost per unit. To do this, we take the difference in total cost between the highest and lowest activity levels (in this case, between 6,500 units and 3,500 units), and divide by the difference in activity levels:

($566.00 - $352.00) / (6,500 - 3,500) = $0.06

This means the electrical cost increases by $0.06 per unit.

Next, we can use either the high or low observation to solve for the fixed cost. Let's use the highest observation:

$566.00 = ($0.06 x 6,500) + Fixed cost

$566.00 = $390.00 + Fixed cost

Fixed cost = $176.00

So the estimated fixed cost per month for electricity is $176.00, which is closest to answer D, $48.00. However, none of the answer choices are an exact match, indicating some rounding or calculation errors may have occurred.