The following data pertains to activity and utility costs for two recent years: Using the high-low method,the cost formula for utilities is:
A)$1.50 per unit
B)$1.20 per unit
C)$3,000 plus $3.00 per unit
D)$4,500 plus $0.75 per unit

Question

The following data pertains to activity and utility costs for two recent years:  Using the high-low method,the cost formula for utilities is:
A)$1.50 per unit 
B)$1.20 per unit 
C)$3,000 plus $3.00 per unit 
D)$4,500 plus $0.75 per unit

Quizplus · Accepted Answer

To use the high-low method, we need to first identify the highest and lowest activity levels and their corresponding utility costs. From the data given in the table, the highest activity level is 4,500 units in year 2, with a corresponding utility cost of $6,000. The lowest activity level is 1,500 units in year 1, with a corresponding utility cost of $4,500.

Next, we calculate the variable cost per unit using the formula:
Variable cost per unit = (Highest cost - Lowest cost)/ (Highest activity - Lowest activity)
Variable cost per unit = ($6,000 - $4,500)/ (4,500 - 1,500) = $1.50 per unit

Finally, we can calculate the fixed costs using either the highest or lowest activity level and its corresponding total cost. Let's use the highest activity level:
Total cost = Fixed cost + (Variable cost per unit x Activity level)
$6,000 = Fixed cost + ($1.50 x 4,500)
Fixed cost = $4,500

Therefore, the cost formula for utilities using the high-low method is:
Total cost = $4,500 + $0.75 per unit, or
Answer: D: $4,500 plus $0.75 per unit.

The Following Data Pertains to Activity and Utility Costs for Two