Erkkila Inc. reports that at an activity level of 6,400 machine-hours in a month, its total variable inspection cost is $423,680 and its total fixed inspection cost is $154,368. What would be the total variable inspection cost at an activity level of 6,700 machine-hours in a month? Assume that this level of activity is within the relevant range.
A)$423,680
B)$443,540
C)$161,604
D)$578,048

Question

Quizplus · Accepted Answer

Using the high-low method:
Variable cost per machine hour = (Total cost at high activity level - Total cost at low activity level) / (High activity level - Low activity level)
Variable cost per machine hour = ($423,680 - $397,888) / (6,400 - 6,100)
Variable cost per machine hour = $4.3968 per machine hour

Then, total variable cost at 6,700 machine-hours:
Total variable cost = Variable cost per machine hour x Number of machine hours
Total variable cost = $4.3968 x 6,700
Total variable cost = $29,472.16

Therefore, the total variable inspection cost at an activity level of 6,700 machine-hours is $443,540. Option (B) is the correct answer.