Question

Song, Inc., uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40. On the basis of this information, the fixed cost was:

Answer 1

$550,000

Step-by-step explanation:

The computation of the fixed cost is shown below:

But before that the variable cost per hour is

= (25,000 ×$30.40 - 22,000 × $33.40) ÷ (25,000 - 22,000)

= ($760,000 - $734,800) ÷ (3,000)

= $8.4

Now the fixed cost is

= $760,000 - (25,000 × $8.4)

= $550,000