Question

Lowden Company low and high level of activity last year was 40,000 units produced in June and 120,000 units produced in November. Utility costs were $60,000 in June and $156,000 in November. Using the high-low method, estimated total utility cost for a month in which 80,000 units will be produced is not determinable with the information given. $120,000. $108,000. $104,001.

Answer 1

Answer: Option (B) is correct.

Explanation:

Given that,

High level of activity = 120,000 units

Low level of activity = 40,000 units

Utility costs = $60,000 in June  

Utility costs = $156,000 in November

Variable cost per unit:

= $\frac{Change\ in\ total\ cost}{High\ minus\ low\ activity\ level }$

=  $\frac{156,000 - 60,000}{120,000 - 40,000}$

= $1.2 per unit

Fixed cost element:

= Total cost at high level - variable cost at high level

= $156,000 - $1.20 x 120,000 units

= $156,000 - $144,000

= $12,000

Utility cost for a month:

=  Fixed cost per month + $1.20 variable cost per unit at 80,000 units

= $12,000 + $1.20 x 80,000 units

= $108,000