Question

In the Gabbana Company, maintenance costs are a mixed cost. At the low level of activity (40 direct labor hours), maintenance costs are $600. At the high level of activity (100 direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost?

Answer 1

(i) $8.33 per unit

(ii) $267

Step-by-step explanation:

Under high-Low method:

`Variable\ cost=(Cost\ at\ high\ activity-cost\ at\ low\ activity)/(Highest\ activity-Lowest\ activity)`

`Variable\ cost=(1,100-600)/(100-40)`

`Variable\ cost=(500)/(60)`

= $8.33

Total cost = variable cost per unit + Fixed cost

1,100 = (8.33 × 100) + Fixed cost

1,100 - 833 = Fixed cost

$267 = Fixed cost