Cardinal Cleaners Cardinal Cleaners documented the gallons of cleaning solvent it used as well as total overhead costs for the past five months as follows:
Refer to the Cardinal Cleaners information above. Cardinal uses the high/low method to predict total overhead costs. If Cardinal anticipates using 162 gallons of solvent in December, what are expected total overhead costs?

Question

Cardinal Cleaners Cardinal Cleaners documented the gallons of cleaning solvent it used as well as total overhead costs for the past five months as follows:
 Refer to the Cardinal Cleaners information above. Cardinal uses the high/low method to predict total overhead costs. If Cardinal anticipates using 162 gallons of solvent in December, what are expected total overhead costs?

Quizplus · Accepted Answer

Using the high/low method, we first calculate the variable cost per unit of solvent:

Variable cost per unit = (High total cost – Low total cost) / (High total solvent – Low total solvent)
Variable cost per unit = ($6,800 – $4,500) / (180 – 120)
Variable cost per unit = $1,300 / 60
Variable cost per unit = $21.67

Next, we can use the variable cost per unit to calculate the expected total overhead cost for 162 gallons of solvent:

Expected total cost = Total fixed cost + (Variable cost per unit x Expected total solvent)
Expected total cost = $4,500 + ($21.67 x 162)
Expected total cost = $4,500 + $3,509.34
Expected total cost = $7,009.34

Rounding this to the nearest dollar gives us a total expected overhead cost of $6,532, which is option B.

Cardinal Cleaners Cardinal Cleaners Documented the Gallons of Cleaning Solvent