Question

The following information is available for a company's utility cost for operating its machines over the last four months.

Month Machine hours Utility cost
January 1,020 $6,570
February 1,920 $7,140
March 2,640 $8,100
April 720 $4,500

Using the high-low method, the estimated variable cost per machine hour for utilities is:_______

Answer 1

Answer:

Using the high-low method, the estimated variable cost per machine hour for utilities is $1.875/ machine hour

Explanation:

High Low Method is a method used to separate Fixed and Variable Costs Components of a semi-variable cost/overhead.

Step 1 : Establish 2 points - The Highest and The Lowest

High - March 2,640 hrs : $8,100

Low - April 720 hrs : $ 4,500

Step 2 Calculate the variable Cost Component

Variable Costs = Overhead Cost difference /Activity difference

                        = ($8,100-$4,500)/(2,640hrs-720hrs)

                        = $3,600/1,920hrs

                        = $1.875/hr