Question

Oak Island Amusements Center provides the following data on the costs of maintenance and the number of visitors for the last three years. Number of Visitors per Year(thousands) Maintenance Costs ($000) 1,875 $ 4,110 2,055 4,515 3,385 7,281 Required: a. Use the high-low method to estimate the fixed cost of maintenance annually and the variable cost of maintenance per visitor. b. The company expects a record 2,900,000 visitors next year. What would be the estimated maintenance costs

Answer 1

Part a

Variable Cost = $1.50 per visitor

Fixed Cost = $187,500

Part b

$4,087,500

Step-by-step explanation:

Step 1 : Identify the High and Low Point

High : 2,375,000 visitors at $3,750,000

Low : 1,825,000 visitors at $2,925,000

Step 2 : Determine Variable Cost

Variable Cost = Diff in Overheads ÷ Diff in Visitors

= ($3,750,000 - $2,925,000) ÷ ( 2,375,000 - 1,825,000)

= $825,000 ÷ 550,000

= $1.50

Step 2 : Determine the Fixed Cost

Fixed Cost = Total Overheads - Variable Costs

Choosing the High point

= $3,750,000 - $1.50 x 2,375,000

= $187,500

Step 3 : Determine Maintenance Cost on 2,600,000 visitors

Cost formula : Maintenance Cost = $187,500 + $1.50 per visitor

therefore,

for 2,600,000 visitors,

Maintenance Cost = $187,500 + $1.50 x 2,600,000

= $4,087,500