Using the high-low method of analysis, the estimated variable cost per machine hour for electricity is closest to:

A) $0.40
B) $0.65
C) $0.70
D) $0.67

Question

Using the high-low method of analysis, the estimated variable cost per machine hour for electricity is closest to:A) $0.40B) $0.65C) $0.70D) $0.67

SAVANNAH GOODMAN · Accepted Answer

Final Answer : B, Explanation :  Using the high-low method, we need to identify the highest and lowest activity levels and the corresponding total costs. The data given in the question is:Highest activity level: 6,000 machine hours, Total cost: $4,800Lowest activity level: 4,000 machine hours, Total cost: $3,600The change in total cost is ($4,800 - $3,600) = $1,200, and the change in activity level is (6,000 - 4,000) = 2,000 hours.The variable cost per machine hour is therefore:($1,200 ÷ 2,000 hours) = $0.60 per machine hour.The closest value to this from the options given is $0.65, which is therefore the best choice.   Variable cost = Change in cost ÷ Change in activityVariable cost = $780 ÷ 1,200 machine-hours = $0.65 per machine-hour

Using the high-low method of analysis, the estimated variable cost per machine hour for electricity is closest to:

A) $0.40
B) $0.65
C) $0.70
D) $0.67

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