Question
Management believes that maintenance cost is a mixed cost that depends on machine hours. Use the HIGH LOW method to estimate the variable and fixed components of this cost. Compute the variable component first and round the nearest whole cent. Compute the fixed component second and round off to the nearest whole dollar. These estimates would be closest to:
Machine-Hours Maintenance Cost
March 3,135 $48,340
April 3,095 $47,993
May 3,133 $48,345
June 3,157 $48,548
July 3,065 $47,733
August 3,076 $47,830
September 3,084 $47,880
October 3,125 $48,247
November 3,098 $48,014
Answer:
Variable maintenance cost per hour =$9
Fixed maintenance cost =$ 20,581
Step-by-step explanation:
Using the a high and low technique, total cost can be analyzed and separated into fixed and variable portion. This analysis helps in the forecast of cost and therefore important for the preparation of budget.
Variable cost per activity unit
= (Cost at high activity - Cost at low activity)/ (high activity - low activity)
Fixed cost = Total cost at high activity - (VC per act × high activity)
So, we can apply the above formula to the given data:
High 3,157 $48,548
Low 3,065 $47,733
Variable maintenance cost = ($48,548- $47,733)/(3,157 - 3,065)
= $9
Fixed maintenance cost = 48,548 - (8.86×3,157)= $ 20,581
Variable maintenance cost per hour =$9
Fixed maintenance cost =$ 20,581