Question

Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year:Month - Utilities($) - Machine HoursJanuary - 8,700 - 800February - 8,360 - 720March - 8,950 - 810April - 9.360 - 920May - 9.625 - 950June - 9,150 - 900 The fixed utilities cost per month for Barkoff is: A) $4,400. B) $5,1 00. C) $4,760. D) $3,764. E) None of the answers is correct.

Answer 1

Answer:

See below.

Explanation:

Lets first calculate variable cost per unit using the highest and lowest activities,

Highest Activity 950 hours $9625 cost in month of May

Lowest activity 720  hours $8360 cost in month of February

Variable cost / unit

= (High activity cost - low activity cost) / (High activity hours - low activity hours)

Variable cost = (9625 - 8360) / (950-720)

Variable cost = $5.5/hour

We can compute the fixed element by multiplying variable cost by hours and subtracting from total cost corresponding to that activity level.

Fixed cost = 8360 - (5.5*720) = $4,400

Hope that helps.