Question

Nation’s Capital Fitness, Incorporated, operates a chain of fitness centers in the Washington, D.C., area. The firm’s controller is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the firm’s equipment maintenance costs must be determined. The accounting staff has suggested the use of an equation, in the form of Y = a + bX, for maintenance costs. Data regarding the maintenance hours and costs for last year are as follows:

Month Hours of Maintenance Service Maintenance Costs
January 560 $ 4,782
February 460 4,220
March 300 2,780
April 500 4,300
May 350 3,040
June 470 4,170
July 360 3,090
August 440 3,560
September 480 3,950
October 380 3,210
November 380 3,210
December 320 3,120
Total 5,000 $ 43,432
Average 417 $ 3,619

4-a. Compute the variable cost per hour and the fixed cost per hour at 610 hours of activity.

Answer 1

Variable cost per unit = (Highest maintenance cost - Lowest maintenance cost) / (Highest activity level - Lowest activity level) = ($4,782 - $2,780) / (560 - 300) = $1,002 / 260 = $3.86 per hour

Fixed cost per hour = Fixed cost / Activity level = $2,629 / 610 = $4.31 per hour

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