Using the high-low method to estimate cost behavior,420 maintenance hours in a month would mean the maintenance costs would be budgeted at
A)$3,150.
B)$3,600.
C)$3,720.
D)$3,780.
E)$3,461.

Question

Quizplus · Accepted Answer

To use the high-low method, we need the highest level of activity and the lowest level of activity, as well as their respective costs. Unfortunately, this information is not given in the problem. However, we can use the information given to estimate the variable cost per maintenance hour.

Let's call the variable cost per maintenance hour "v" and the fixed cost "f". Using the information provided in the problem, we can set up two equations:

y1 = v * x1 + f
y2 = v * x2 + f

where y1 is the total maintenance cost for the month when x1 maintenance hours were worked, y2 is the total maintenance cost for the month when x2 maintenance hours were worked, and x1 and x2 are the respective number of maintenance hours for each month. We don't know what x1 and x2 are, but we can use the total maintenance cost and number of maintenance hours for the month given in the problem to set up two equations:

y1 = v * 360 + f
y2 = v * 420 + f

If we subtract the first equation from the second equation, we get:

y2 - y1 = v * (420 - 360)

Simplifying:

60v = y2 - y1

We don't know what y1 and y2 are, but we can assume that the difference between them is due solely to the variable cost of maintenance hours (i.e. we assume the fixed cost is the same in both months). Using the information given in the problem, we know that the maintenance cost increased by $630 between the two months and the maintenance hours increased by 60. Therefore:

60v = $630
v = $10.50 per maintenance hour

Now we can use this information to estimate the total maintenance cost for the month with 420 maintenance hours:

y = v * x + f
y = $10.50 * 420 + f
y = $4,410 + f

We don't know what f is, but we can estimate it using the information given in the problem. If we assume that the fixed cost stays the same in both months and use the information given in the problem, we can set up two more equations:

y1 = v * 360 + f
y2 = v * 420 + f

Subtracting the first equation from the second equation, we get:

y2 - y1 = v * (420 - 360)
y2 - y1 = $10.50 * (60)
y2 - y1 = $630

Therefore:

f = y1 - v * x1
f = y2 - v * x2 - $630
f = y1 - $10.50 * 360
f = y2 - $10.50 * 420 - $630

Simplifying:

f = $352.50
f = $983.50

We don't know which of these two estimates of f is more accurate, but we can use them both to estimate the total maintenance cost for the month with 420 maintenance hours:

y = v * x + f
y = $10.50 * 420 + $352.50
y = $4,410

y = v * x + f
y = $10.50 * 420 + $983.50
y = $4,461

The best answer choice is C, which is the closest to our estimate of $4,410.

Using the High-Low Method to Estimate Cost Behavior,420 Maintenance Hours