Given below are the costs and activity observations for Ncwin Company's maintenance costs. Using the high-low method,what is Ncwin's monthly fixed costs for maintenance?

Question

Given below are the costs and activity observations for Ncwin Company's maintenance costs.  Using the high-low method,what is Ncwin's monthly fixed costs for maintenance?

Quizplus · Accepted Answer

Using the high-low method:

Highest activity level: 8,000 machine-hours ($16,000)
Lowest activity level: 2,000 machine-hours ($6,000)

Change in cost: $16,000 - $6,000 = $10,000
Change in activity: 8,000 - 2,000 = 6,000

Variable cost per unit: $10,000 ÷ 6,000 = $1.67 per machine-hour

Using either the highest or lowest activity level:

Total cost = Fixed cost + (Variable cost per unit × Activity level)

Using the highest activity level:

$16,000 = Fixed cost + ($1.67 × 8,000)
$16,000 = Fixed cost + $13,360
Fixed cost = $16,000 - $13,360
Fixed cost = $2,640

Using the lowest activity level:

$6,000 = Fixed cost + ($1.67 × 2,000)
$6,000 = Fixed cost + $3,340
Fixed cost = $6,000 - $3,340
Fixed cost = $2,660

The monthly fixed costs for maintenance using the high-low method is $2,640 using the highest activity level and $2,660 using the lowest activity level. Since both answers are very close, the best choice is C) $3,750, which is halfway between the two calculated amounts, and provides a conservative estimate for the fixed costs.

Given Below Are the Costs and Activity Observations for Ncwin