How to Calculate Estimated Fixed Cost using High-Low Method

Question:

Based on the provided data, what is the estimated fixed cost element of power costs using the high-low method?

Answer:

The estimated fixed cost element of power costs using the high-low method is $7,200.

When using the High-Low method to calculate the estimated fixed cost, we first determine the variable cost per unit by dividing the difference in costs at the highest and lowest activity levels by the difference in machine hours. In this case:

Variable cost per unit = ($18,000 - $9,000) / (6,000 - 1,000) = $9 / 5 = $1.8 per unit.

Next, we can calculate the fixed cost by subtracting the product of the variable cost per unit and the highest activity units from the highest activity cost:

Fixed Cost = $18,000 - ($1.8 * 6,000) = $18,000 - $10,800 = $7,200.

Therefore, the estimated fixed cost element of power costs using the high-low method is $7,200.