The following data pertains to activity and utility costs for two recent years: $$15,000$12,000\begin{array} { | l | l | l | } \hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Activity level in units } & 12,000 & 8,000 \\\hline \text { Utilities cost } & \$ 15,000 & \$ 12,000 \\\hline\end{array}$ Using the high-low method, the cost formula for utilities is?

A) $1.25 per unit.
B) $6,000 plus $0.75 per unit.
C) $8,000 plus $0.50 per unit.
D) $1.50 per unit.

Question

The following data pertains to activity and utility costs for two recent years:

$15,000$12,000\begin{array} { | l | l | l | } \hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Activity level in units } & 12,000 & 8,000 \\\hline \text { Utilities cost } & \$ 15,000 & \$ 12,000 \\\hline\end{array}

Using the high-low method, the cost formula for utilities is?

A) $1.25 per unit.
B) $6,000 plus $0.75 per unit.
C) $8,000 plus $0.50 per unit.
D) $1.50 per unit.

Gurpreet Singh · Accepted Answer

Final Answer : B, Explanation :  The high-low method involves taking the highest and lowest activity levels and their corresponding costs to determine the variable cost per unit and the fixed cost. The variable cost per unit is calculated by dividing the difference in costs by the difference in activity levels. For the given data: Variable cost per unit = ($15,000 - $12,000) / (12,000 units - 8,000 units) = $3,000 / 4,000 units = $0.75 per unit. To find the fixed cost, we use one of the points (e.g., Year 1) and the formula: Total cost = Fixed cost + (Variable cost per unit × Activity level). So, $12,000 = Fixed cost + ($0.75 × 8,000 units). Solving for Fixed cost gives $6,000. Therefore, the cost formula is $6,000 plus $0.75 per unit.

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