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. Round your final answer to the nearest dollar. Do not round interim calculations. s January February March April Col1 Cost $26,200 38,600 28,400 30,600Col2 Machine Hour 9,500 17,500 11,800 14,500

Answer 1

Cost Machine hours

$

High 38,600 17,500

Low (26,200) (9,500)

12,400 8,000

Variable cost per hour (b) = $12,400/8,000 hours

= $1.55 per machine hour

Y = a + bx

At highest points

$38,600 = a + $1.55(17,500)

$38,600 = a + $27,125

$38,000 - $27,125 = a

a = $10,875

Fixed cost is $10,875

Step-by-step explanation:

There is need to obtain the highest cost and highest machine hours, and lowest cost and lowest machine hours. Then, we will deduct the lowest cost and lowest machine hours from the highest cost and highest machine hours. Thereafter, we will divide difference in cost by difference in machine hours in order to obtain variable cost per machine hour.

Finally, we will apply linear equation (Y = a +bx) and make (a) the subject of the formula where a represents fixed cost.