Northlake,Inc. ,uses the high-low method to analyze cost behavior.The company observed that at 20,000 machine hours of activity,total maintenance costs averaged $10.50 per hour.When activity jumped to 24,000 machine hours,which was still within the relevant range,the average total cost per machine hour was $9.75.On the basis of this information,the company's fixed maintenance costs were:
A)$24,000.
B)$90,000.
C)$210,00.
D)$234,000.
E)an amount other than those listed abovE.

Question

Quizplus · Accepted Answer

Using the high-low method, we can first calculate the variable cost per machine hour:

Variable cost per machine hour = (Cost at high activity – Cost at low activity) ÷ (High activity – Low activity)

Variable cost per machine hour = ($9.75 – $10.50) ÷ (24,000 – 20,000) = -$0.1875

Note that the negative sign indicates an inverse relationship between machine hours and cost (i.e. as machine hours increase, cost per hour decreases).

Next, we can use either the cost at high activity or low activity to solve for the fixed cost:

Fixed cost = Total cost – Variable cost * Total activity

Fixed cost = $10.50 – (-$0.1875 * 20,000) = $13,875

Fixed cost = $13,875 – (-$0.1875 * 24,000) = $17,775

Since we are only looking for the fixed maintenance costs, the correct answer is B) $90,000.