Question

The following data pertains to activity and maintenance costs for two recent years: Year 2 Year 1Activity Levels in units 12,000 8,000Maintenance Cost $15,000 $12,000Using the high-low method, the cost formula for maintenance would be:___________

Answer 1

Total cost= 0.75x + 6,000

Step-by-step explanation:

Giving the following information:

Year 2:

Units= 12,000

Cost= $15,000

Year 1:

Units= 8,000

Cost= $12,000

To determine the cost formula, first, we need to calculate the unitary variable cost and fixed cost.

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (15,000 - 12,000) / (12,000 - 8,000)= $0.75 per unit

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 15,000 - (0.75*12,000)= $6,000

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 12,000 - (0.75*8,000)= $6,000

Now, the cost formula is:

Total cost= unitary variable cost + fixed cost

Total cost= 0.75x + 6,000