Question

Pablo was reviewing the water bill for his carwash business and determined that the highest​ bill, $ 5,300 occurred in July when 2,500 cars were washed and the lowest​ bill, $ 3, 200,occurred in February when 1,900 cars were washed. What was the variable cost per​ carwash?

A.$ 1.68

B.$ 1.28

C.$ 3.50

D.$ 2.12

Answer 1

The answer is C

High Low Method:

High low method can be used to split (or seperate) the fixed cost element from the variabe cost element.

STEP 1:

Gather the highest activity and lowest activity and their respective associated costs.

In the given question,

Highest activity = 2,500 cars washing (in July)

Associated cost = $5,300

Lowest activity = 1,900 cars washing (in February)

Associated cost = $3,200

STEP 2:

Calculation of Variable cost per unit (In this case- variable cost per car wash)

Variable cost per car wash

= [Cost at high level activity - Cost at low level of activity] ÷ [Highest activity - Lowest activity]

= [$5,300 - $3,200] ÷ [2,500 - 1,900]

= $3.50

Therefore, Variable cost per Cash wash = $3.50