Question

At the high level of activity in November, 8000 machine hours were run and power costs were $16000. In April, a month of low activity, 3000 machine hours were run and power costs amounted to $7000. Using the high-low method, the estimated fixed cost element of power costs is

Answer 1

Answer:

Fixed cost = $1,600

Explanation:

We know,

Total cost = Variable cost + Fixed cost.

And, Using high-low method, variable cost per unit = (Highest cost - Lowest cost) ÷ (Highest Activity - Lowest Activity)

Given,

Highest cost = $16,000

Lowest cost = $7,000

Highest Activity = 8,000 machine hours

Lowest Activity = 3,000 machine hours

Therefore, Using high-low method, variable cost per unit = $(16,000 - 7,000) ÷ (8,000 - 3,000) machine hours

variable cost per unit = $9,000 ÷ 5,000 machine hours = $1.8

Using highest activity and highest cost (Month of November),

Total cost = Variable cost + Fixed cost.

Total cost = (Variable cost per unit x Total activity) + Fixed cost

$16,000 = ($1.8 × 8,000 hours) + Fixed cost

or, $16,000 = $14,400 + Fixed cost

or, $16,000 - 14,400 = Fixed cost

Therefore, Fixed cost = $1,600