Question

In the Vaughn, maintenance costs are a mixed cost. At the low level of activity (80 direct labor hours), maintenance costs are $600. At the high level of activity (500 direct labor hours), maintenance costs are $2750. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost?

Answer 1

The correct answer is $5.12 and $190.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Lowest direct labor hour = 80 direct labor hour

Lowest maintenance cost = $600

Highest direct labor hour = 500

Highest maintenance cost = $2,750

So, we can calculate the variable maintenance cost per unit by using following formula:

Variable maintenance cost = (Highest cost - Lowest cost) ÷ (Highest direct labor hour - lowest direct labor hour)

= ($2,750 - $600 ) ÷ ( 500 - 80)

= $2,150 ÷ 420

= $5.12

Now we can calculate the total fixed maintenance cost by using following formula:

Total cost = Variable cost + Fixed cost

$2,750 = ( 500 × $5.12) + Fixed cost

Fixed cost = $2,750 - $2,560

= $190