Question

Given the following cost and activity observations for Smithson Company’s utilities, use the high-low method to calculate Smithson’s fixed costs per month. Do not round intermediate calculations.
Cost Machine Hours
January $52,200 20,000
February 75,000 29,000
March 57,000 22,000
April 64,000 24,500

a. $2,530
b. $22,800
c. $1,600
d. $50,600

Answer 1

Answer:

c. $1,600

Explanation:

Using high low method we have

Highest cost = $75,000 for 29,000 hours in the month of February.

Lowest Cost = $52,200 for 20,000 hours in the month of January.

Variable Cost per unit = $\frac{Change \: in \: cost}{Change \: in \: hours} = \frac{75,000 - 52,200}{29,000 - 20,000} = 2.533$

Or

$52,200 = 20,000 V + F

$75,000 = 29,000 V + F

$22,800 = 9,000 V

$2.53 = V

20,000 V = $50,600

$52,200 - $50,600 = $1,600

Fixed Cost = $1,600