Using the high-low method, Duke & Duchess's monthly overhead cost is closest to which of the following?

Question

Quizplus · Accepted Answer

The high-low method involves identifying the highest and lowest activity levels and their corresponding costs, and using this information to estimate the fixed and variable components of the overhead cost.

From the data given in the problem:
- The highest activity level is 40,000 meals served in a month, with a corresponding overhead cost of $167,450.
- The lowest activity level is 20,000 meals served in a month, with a corresponding overhead cost of $120,386.

Using the high-low method, we can first calculate the variable cost per unit of activity:
Variable cost per unit = (highest cost - lowest cost) / (highest activity - lowest activity)
Variable cost per unit = ($167,450 - $120,386) / (40,000 - 20,000) = $4.035 per meal

Next, we can use either the highest or lowest activity level to calculate the fixed cost component of the overhead:
Fixed cost = Total cost - (Variable cost per unit x Total activity)
Using the highest activity level:
Fixed cost = $167,450 - ($4.035 per meal x 40,000 meals) = $12,990
Using the lowest activity level:
Fixed cost = $120,386 - ($4.035 per meal x 20,000 meals) = $12,494

Both calculations for fixed cost are quite close, so either value could be considered as the estimate for monthly fixed overhead cost. Adding in the variable cost component based on actual activity level, we get the following estimates for monthly overhead cost:
- For 25,000 meals served in a month: $12,990 + (25,000 meals x $4.035 per meal) = $111,625
- For 30,000 meals served in a month: $12,990 + (30,000 meals x $4.035 per meal) = $123,255

Of the answer options given, the closest estimate is D) $46,918. This is quite far off from our high and low estimates above, so it's possible that there's some other method or information being used to arrive at this figure. However, based solely on the information given in the problem and using the high-low method, D is not a good estimate for Duke & Duchess's monthly overhead cost.

Using the High-Low Method, Duke & Duchess's Monthly Overhead Cost