Answer (A) is correct . Once the variable portion of a mixed cost has been determined using the high-low method (in this case, $400 cost difference ÷ 1,000 machine hours difference = $.40 per machine hour), it can be substituted in the total cost formula for one of the months to isolate the fixed portion. Variable costs + Fixed costs = Total cost (2,600 × $.40) + Fixed costs = $1,200 Fixed costs = $1,200 – $1,040 Fixed costs = $160
Answer (B) is incorrect because The fixed cost is not $320.
Answer (C) is incorrect because The fixed cost is not $640.
Answer (D) is incorrect because The variable cost at 2,600 machine hours is $1,040.
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