Average maintenance costs are $1.50 per machine-hour at an activity level of 8,000 machine-hours and $1.20 per machine-hour at an activity level of 13,000 machine-hours.Assuming that this activity is within the relevant range,total expected maintenance cost for a budgeted activity level of 10,000 machine-hours would be closest to?
A) $11,433.
B) $13,440.
C) $15,000.
D) $16,128.

Question

Quizplus · Accepted Answer

We will use the high-low method to calculate the variable cost per machine-hour:

Variable cost per machine-hour = (Total maintenance cost at high activity level - Total maintenance cost at low activity level) / (High activity level - Low activity level)
Variable cost per machine-hour = ($1.20 - $1.50) / (13,000 - 8,000)
Variable cost per machine-hour = -$0.06

Note that the variable cost per machine-hour is negative because the maintenance cost decreased as the activity level increased.

Now we can calculate the total expected maintenance cost for a budgeted activity level of 10,000 machine-hours:

Total expected maintenance cost = Variable cost per machine-hour x Activity level + Fixed cost
Total expected maintenance cost = (-$0.06 x 10,000) + ($1.50 x 10,000)
Total expected maintenance cost = -$600 + $15,000
Total expected maintenance cost = $14,400

Therefore, the closest answer is B) $13,440.

Average Maintenance Costs Are $1