Question

At the high level of activity in November, 8000 machine hours were used and power costs were $15000. In April, a month of low activity, 1000 machine hours were used and power costs were $4500. Using the high-low method, the estimated fixed cost component of power costs is

a. 3000

b. 4500

c. 15,000

d. 12,000

Answer 1

Using the high-low method, we need to determine the variable cost component of power costs first.

The variable cost per machine hour = (Total cost at high activity level - Total cost at low activity level) / (Total machine hours at high activity level - Total machine hours at low activity level)

Variable cost per machine hour = (15000 - 4500) / (8000 - 1000) = 1.5

Now we can use this variable cost per machine hour and any of the given data points to find the fixed cost component. Let's use the high activity level data point.

Total cost at high activity level = Fixed cost component + Variable cost per machine hour * Total machine hours at high activity level

15000 = Fixed cost component + 1.5 * 8000

Fixed cost component = 15000 - 1.5 * 8000 = 3000

Therefore, the estimated fixed cost component of power costs is $3000.

The correct answer is (a) 3000.