Question

The Gabbana Company’s maintenance costs are a mixed cost. At the low level of activity (50 direct labor hours), maintenance costs are $600. At the high level of activity (100 direct labor hours), maintenance costs are $1,100. Using the high-low method, the variable maintenance cost per unit would be ________ and the total fixed maintenance cost would be _________.

Answer 1

Using the high-low method, the variable maintenance cost per unit would be $10 and the total fixed maintenance cost would be $100.

Step-by-step explanation:

variable cost per unit = (highest activity cost - lowest activity cost) / (highest activity units - lowest activity units) = ($1,100 - $600) / (100 - 50) = $500 / 50 = $10 per direct labor hour

fixed cost = highest activity cost - (variable cost per unit x highest activity units) = $1,100 - ($10 x 100) = $1,100 - $1,000 = $100

The high low method is effective when the company's activity level is not steady and varies significantly during different periods.