Question

The following data pertains to activity and the cost of maintenance for two recent months:

Month 1 Month 2

Production Volume 2000 units 2500 units
Maintenance Cost $900 $1,100
Based on the Hi-Low Method, what is the best estimate of the total month 1 variable cost for maintenance?
1) $800
2) $900
3) $1,100
4) Cannot be determined

Answer 1

To find the total variable cost for maintenance in Month 1 using the high-low method, calculate the variable cost per unit and multiply by the production volume for that month. The result is a variable cost of $800 for Month 1.

Step-by-step explanation:

To estimate the total variable cost for maintenance using the high-low method, we first identify the highest and lowest activity levels and their corresponding costs. From the given data, Month 1 has 2000 units with a maintenance cost of $900, and Month 2 has 2500 units with a maintenance cost of $1,100.

The difference in cost between the high and low activity levels is $1,100 - $900 = $200. The difference in production volume is 2500 units - 2000 units = 500 units. The variable cost per unit is $200 / 500 units = $0.40 per unit. Thus, the variable cost for Month 1 at 2000 units would be 2000 units × $0.40 = $800.

Fixed costs are given as $160 (regardless of production levels). Therefore, the total variable cost for Month 1 would be $800, plus the fixed cost of $160 results in a total cost of $960 for Month 1. However, since we are only looking for the variable portion, the answer is $800.