Question

The following data relate to the Lisle Company for May and August of the current year:

May August
Maintenance hours 25,000 29,000
Maintanance cost $1,175,000 $1,247,000
May and August were the lowest and highest activity levels, and Lisle uses the high-low method to analyze cost behavior.

Which of the following statements is true?

The fixed maintenance cost is $725,000 per month.

The variable maintenance cost is $43 per hour.

The variable maintenance cost is $47 per hour.

More than one of the other answers is true.

The variable maintenance cost is $45 per hour.

Answer 1

The fixed maintenance cost is $725,000 per month.

Step-by-step explanation:

The calculation of the fixed maintenance cost and the variable maintenance cost per hour by using high low method is presented below:

Variable maintenance cost per hour = (High Maintenance cost - low Maintenance cost) ÷ (High Maintenance hours - low Maintenance hours)

= ($1,247,000 - $1,175,000) ÷ (29,000 hours - 25,000 hours)

= $72,000 ÷ 4,000 hours

= $18

And the fixed cost equal to

= High Maintenance cost - (High Maintenance hours × Variable cost per hour)

= $1,247,000 - (29,000 hours × $18)

= $1,247,000 - $522,000

= $725,000