Question

At the high and low levels of activity during the month, direct labor hours are $90,000 and $40,000 respectively. The related costs are $165,000 and $100,000. What is the fixed and variable costs at any level of activity?

Answer 1

To find the fixed and variable costs at any level of activity, calculations using the high-low method show that the variable cost is $1.30 per labor hour and the fixed cost is $48,000.

Step-by-step explanation:

The question asks us to determine the fixed and variable costs at any level of activity based on the given data. To calculate these costs, we can use the high-low method, which involves taking the difference in costs at the high and low levels of activity, dividing it by the difference in activity levels to find the variable cost per unit, and then calculating fixed costs by subtracting the total variable costs at either the high or low activity level from the total costs at that level.

Here's how the calculation works step-by-step:

1. Subtract the lower level of activity cost from the higher level activity cost to find the total variable cost difference: $165,000 - $100,000 = $65,000.
2. Subtract the low level of activity from the high level of activity to find the difference in direct labor hours: $90,000 - $40,000 = $50,000 hours.
3. Divide the total variable cost difference by the direct labor hours difference to find the variable cost per labor hour: $65,000 / $50,000 hours = $1.30 per hour.
4. To find fixed costs, simply take either the total cost at the high level or the low level of activity and subtract the total variable costs (variable cost per labor hour multiplied by the number of labor hours). For instance, at the high level: $165,000 total cost - ($1.30 variable cost per hour × $90,000 hours) = $165,000 - $117,000 = $48,000 fixed costs.

This method determines that the variable cost is $1.30 per labor hour and the fixed cost is $48,000.