Question

At the high level of activity in November, 7,000 machine hours were run and power costs were $18,000. In April, a month of low activity, 2,000 machine hours were run and power costs amounted to $9,000. Using the high-low method, the estimated fixed cost element of power costs is

Answer 1

Answer:

$5,400

Explanation:

During a high level of activity in the month of November, 7,000 machine hours were run and the power costs was $18,000

During a low level of activity in the month of April, 2,000 machine hours were run and the power costs was $9,000

The first step is to calculate the variable cost per unit

= (high power cost-low power cost)/(high machine hours-low machine hours)

= ($18,000-$9,000)/(7,000-2,000)

= 9,000/5,000

= 1.8

Therefore, the estimated fixed cost of the power costs can be calculated as follows

= High power cost-high machine hours×variable cost per unit

= $18,000-7,000×1.8

= 18,000-12,600

= $5,400

Hence the estimated fixed cost element of power costs is $5,400