Question

At the high level of activity in November, 9000 machine hours were run and power costs were $16000. In April, a month of low activity, 3000 machine hours were run and power costs amounted to $7000. Using the high-low method, the estimated fixed cost element of power costs is

Answer 1

Activity	Machine hours	Power costs
High	9000	$ 16,000.00
Low	3000	$    7,000.00
Using High-low method, variable cost per unit = [Change in power costs]/[change in machine hours]
16000-7000/9000-3000
1.5	Per hour
Using the High activity level, Total cost = Variable cost + fixed cost
At 9000 level,
Total cost = 9000 hours * 1.5 per hour + fixed cost
16000= 13500+ fixed cost
Therefore, Fixed cost = 16000-13500 = 2500
Fixed cost	$          2,500.00