Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Using the high-low method, what is the variable maintenance cost per direct labor hour?
A) $1.00
B) $0.10
C) $0.20
D) $1.50

Question

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available:  Using the high-low method, what is the variable maintenance cost per direct labor hour?
A) $1.00 
B) $0.10 
C) $0.20 
D) $1.50

Quizplus · Accepted Answer

To use the high-low method, we need to find the two points with the highest and lowest direct labor hours and their respective maintenance costs. Looking at the data provided, the highest direct labor hours are 30,000, and the corresponding maintenance cost is $6,000. The lowest direct labor hours are 20,000, and the corresponding maintenance cost is $2,000.

The variable cost per direct labor hour can be calculated as follows:

Variable cost per direct labor hour = (High cost - Low cost) / (High direct labor hours - Low direct labor hours) 
= ($6,000 - $2,000) / (30,000 - 20,000) 
= $4000 / 10,000 
= $0.40

Therefore, the variable maintenance cost per direct labor hour is $0.40. The correct answer choice is C, $0.20, which could be an option with a typographical error.

Liva Company Wants to Develop a Cost Function for Its