Comco, Inc. has accumulated the following data for the cost of maintenance on its machinery for the last four months: Assume that the relevant range includes all of the activity levels mentioned in this problem. Assuming Comco uses the high-low method of analysis, the fixed cost of maintenance would be estimated to be:
A)$14,500
B)$5,020
C)$13,000
D)$12,320

Question

Comco, Inc. has accumulated the following data for the cost of maintenance on its machinery for the last four months:  Assume that the relevant range includes all of the activity levels mentioned in this problem. Assuming Comco uses the high-low method of analysis, the fixed cost of maintenance would be estimated to be:
A)$14,500 
B)$5,020 
C)$13,000 
D)$12,320

Quizplus · Accepted Answer

Using the high-low method, we need to determine the variable cost per unit and the fixed cost.

Variable cost per unit = (Total cost at high activity level - Total cost at low activity level)/(High activity level - Low activity level)

= ($7,880 - $5,120)/(8,000 - 6,000)

= $1,380/2,000

= $0.69

Using the variable cost per unit, we can find the fixed cost as:

Total cost = Fixed cost + Variable cost per unit x Activity level

Using the high activity level (8,000) and total cost at that level ($7,880), we can solve for fixed cost:

$7,880 = Fixed cost + ($0.69 x 8,000)

Fixed cost = $13,000

Therefore, the estimated fixed cost of maintenance using the high-low method is $13,000.