Question

Jones Company used the high-low method to derive its cost formula for electricity cost. According to the cost formula, the variable cost per unit of activity is $3 per machine-hour. Total electricity cost at the high level of activity was $7,600 and at the low level of activity was $7,300. If the high level of activity was 1,200 machine hours, then the low level of activity was:

Group of answer choices
a.800 machine hours
b.1,100 machine hours
c.1,000 machine hours
d.900 machine hours

Answer 1

To solve the question, calculate the difference in total costs at high and low levels of activity, divide it by the variable cost per machine-hour to find the difference in machine hours, then subtract from the high machine hours to identify the low level of machine hours, which results in 1,100 machine hours. The correct answer is option b.1,100 machine hours.

Step-by-step explanation:

The question involves determining the low level of activity in machine hours using the high-low method, which is used to estimate the variable and fixed components of a cost. In this scenario, the variable cost per unit of activity is given as $3 per machine-hour, and the total cost is provided for the high and low levels of activity. To find the low level of activity in machine hours, we utilize the difference in costs and the variable cost per unit of activity.

Steps for solving:

• Calculate the difference in total cost between the high and low levels of activity. ($7,600 - $7,300 = $300)
• Divide the cost difference by the variable cost per unit to find the difference in machine hours. ($300 ÷ $3 per machine-hour = 100 machine hours)
• Since the high level is 1,200 machine hours, we subtract the difference to obtain the low level of activity. (1,200 - 100 = 1,100 machine hours)

Thus, the answer is that the low level of activity was 1,100 machine hours (option b).