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Machine Cleaning
Hours Expense
Jan>2,100 ---- $900
Feb>2,600 ----1,200
Mar>1,600 ----800
Apr>2,000 ----1,000
Using the high-low method, what is ABC's fixed cost?
A. $160
B. $320
C. $640
D. $1,040
High-Low method is one of the several techniques used to split a mixed cost into its fixed and variable components (see cost classifications).Although easy to understand, high low method is relatively unreliable.This is because it only takes two extreme activity levels (ie labor hours, machine hours, etc.) from a set of actual data of various activity levels and their corresponding total cost figures.These figures are then used to calculate the approximate variable cost per unit (b) and total fixed cost (a) to obtain a cost volume formula
:y = a + bx
High-Low Method Formulas
Variable Cost per UnitVariable cost per unit (b) is calculated using the following formula:
Variable Cost per Unit = y2 - y1 divided by x2 - x1
Where,y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units / labor hours etc.at highest level of activity;andx1 are the number of units / labor hours etc.at lowest level of activity
The variable cost per unit is equal to the slope of the cost volume line (ie change in total cost ÷ change in number of units produced)
Total fixed cost (a) is calculated by subtracting total variable cost from total cost.
In the given example:
Variable cost =0.40 $
Fixed Cost will be:$160 as explained by Mr. Abdul Rasheed. Mohammed.
Note: Due to its unreliability, high low method is rarely used.
Answer is $160 correct .
variable cost = (1200-800) / () =0.4 per hour
Fixed cost =1200 -(2600*.04)=160
