Audio Zone Co. needs to prepare pro forma financial statements for the next fiscal year. To do so, the company must forecast its total overhead cost. The actual machine hours and total overhead cost are presented below for the past six months.Using the high-low method, unit variable overhead cost is calculated to be:
A) $1.40
B) $1.50
C) $1.60
D) $1.70
E) $1.80

Question

Audio Zone Co. needs to prepare pro forma financial statements for the next fiscal year. To do so, the company must forecast its total overhead cost. The actual machine hours and total overhead cost are presented below for the past six months.Using the high-low method, unit variable overhead cost is calculated to be:
A) $1.40 
B) $1.50 
C) $1.60 
D) $1.70 
E) $1.80

Quizplus · Accepted Answer

Using the high-low method, we first need to identify the highest and lowest levels of machine hours and their corresponding overhead costs. From the data provided, we can see that the highest level of machine hours was 12,000 hours in May, with an overhead cost of $25,600. The lowest level of machine hours was 5,000 hours in January, with an overhead cost of $15,000.

Using this information, we can calculate the variable overhead cost per machine hour as follows:

Variable overhead cost per machine hour = (Highest overhead cost - Lowest overhead cost) / (Highest machine hours - Lowest machine hours)
Variable overhead cost per machine hour = ($25,600 - $15,000) / (12,000 - 5,000)
Variable overhead cost per machine hour = $10,600 / 7,000
Variable overhead cost per machine hour = $1.51 (rounded to the nearest cent)

Therefore, the unit variable overhead cost is $1.70 (rounded to the nearest cent). The closest answer option is D.