Question

The following data relate to the Torrence Company for May and August:

May August
Maintenance hours 25000 29,000
Maintenance cost $1175,000 $1247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?

a. The variable maintenance cost is $24 per hour.
b. The fixed maintenance cost is $72,000 per month.
c. More than one of the other answers is true.
d. The variable maintenance cost is $22 per hour.
e. The variable maintenance cost is $18 per hour.

Answer 1

The following data relate to the Torrence Company for May and August:

May August
Maintenance hours 25000 29,000
Maintenance cost $1175,000 $1247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?

a. The variable maintenance cost is $24 per hour.
b. The fixed maintenance cost is $72,000 per month.
c. More than one of the other answers is true.
d. The variable maintenance cost is $22 per hour.
e. The variable maintenance cost is $18 per hour.

The answer is A I think

Answer 2

Variable cost per unit= $18 per unit

Step-by-step explanation:

First, we need to calculate the unitary and fixed costs under the high-low method:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (1,247,000 - 1,175,000) / (29,000 - 25,000)

Variable cost per unit= $18 per unit

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 1,247,000 - (18*29,000)

Fixed costs= $725,000

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 1,175,000 - (18*24,000)

Fixed costs= $725,000

Total cost= 725,000 + 18*x

x= number of hours

For 26,000:

Total cost= 725,000 + 18*26,000

Total cost= $1,193,000