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5 August, 15:37

Larker Brothers, Inc., used the high-low method to derive its cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is $4 per machine-hour. Total electrical power cost at the high level of activity was $19,200 and at the low level of activity was $18,400. If the high level of activity was 3,300 machine hours, then the low level of activity was:

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  1. 5 August, 16:04
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    3,100 machine hours

    Explanation:

    Given that,

    Variable cost per unit of activity = $4 per machine-hour

    Total electrical power cost:

    High level of activity = $19,200

    Low level of activity = $18,400

    High level of activity = 3,300 machine hours

    Let x be the low level of activity,

    Variable cost = Change in cost : Change in activity

    Variable cost = (High level of activity cost - Low level of activity cost) : Change in activity

    4 = ($19,200 - $18,400) : (3,300 - x)

    4 = 800 : (3,300 - x)

    4 (3,300 - x) = 800

    13,200 - 4x = 800

    4x = 13,200 - 800

    = 12,400 : 4

    x = 3,100

    Therefore, the low level of activity was 3,100 machine hours.
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