Answer (C) is correct . The high-low method can be applied to calculate the two portions of a mixed cost. The numerator is the difference between the cost at the highest level of ? activity and the cost at the lowest level ($160,000 – $132,000 = $28,000). The denominator is the difference between the highest level of activity from the lowest level (80,000 – 60,000 = 20,000). The variable portion of the total mixed cost is derived by dividing these two figures ($28,000 ÷ 20,000 = $1.40 per gallon). The fixed portion can be calculated by inserting the appropriate values for either the high or low level as follows: Fixed portion = Total cost – Variable portion = $160,000 – (80,000 × $1.40) = $160,000 – $112,000 = $48,000 The total handling cost for a production level of 75,000 can now be determined:??$48,000 + (75,000 × $1.40) = $153,000.
Answer (A) is incorrect because The amount of $146,000 results from incorrectly assuming that, because 75,000 is halfway between the high and low levels of production given, the cost will be halfway between $160,000 and $132,000.
Answer (B) is incorrect because The variable portion when improperly calculating only at the highest level of production is $150,000.
Answer (D) is incorrect because The variable portion when improperly calculating only at the lowest level of production is $165,000.
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What is the estimated total cost for handling 75,000 gallons?
