Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:

A) $1,120
B) $1,140
C) $1,170
D) $1,130

Question

Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:A) $1,120B) $1,140C) $1,170D) $1,130

Reina Macias · Accepted Answer

Final Answer : B, Explanation :  To use the high-low method, we need to use the highest and lowest activity levels to calculate the variable cost per unit (slope) and the fixed cost component.Based on the data provided, the highest activity level is 12,000 machine-hours with a lubrication cost of $2,840, and the lowest activity level is 8,000 machine-hours with a lubrication cost of $1,940.Using these two data points, we can calculate the variable cost per unit:Variable cost per unit = (Highest cost - Lowest cost) / (Highest activity level - Lowest activity level)= ($2,840 - $1,940) / (12,000 - 8,000)= $900 / 4,000= $0.225 per machine-hourTo find the fixed cost component, we can use either the highest or lowest activity level and the variable cost per unit:Fixed cost component = Total cost - (Variable cost per unit x Activity level)Using the highest activity level:Fixed cost component = $2,840 - ($0.225 x 12,000)= $2,840 - $2,700= $140Using the lowest activity level:Fixed cost component = $1,940 - ($0.225 x 8,000)= $1,940 - $1,800= $140The estimated monthly fixed component of lubrication cost is $140.The closest answer choice is B, $1,140.   Variable cost = Change in cost ÷ Change in activity = $240 ÷ 160 machine hours = $1.50 per machine hourFixed cost = Total cost - Variable costFixed cost = $1,740 - ($1.50 per machine hour × 400 machine hours)= $1,140

Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:

A) $1,120
B) $1,140
C) $1,170
D) $1,130

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