Song, Inc., uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40.
On the basis of this information, what were total maintenance costs when the company experienced 23,000 machine hours?
A) $193,200.
B) $550,000.
C) $734,800.
D) $743,200.
E) $760,000.

Question

Quizplus · Accepted Answer

Using the high-low method formula:

Variable cost per unit = (High cost – Low cost) / (High activity – Low activity)

= ($33.40 - $30.40) / (22,000 - 25,000)

= -$0.006 (cost per machine hour decreases as activity increases)

Fixed cost = Total cost – Variable cost per unit x Activity

(total cost at high activity level)

= $30.40 x 25,000

= $760,000

(total cost at low activity level)

= $33.40 x 22,000

= $734,800

Variable cost per unit = -$0.006

Using the formula: Y = a + bX

(a = fixed cost, b = variable cost per unit)

$734,800 = a - (0.006 x 22,000)

a = $868,800

Total maintenance costs at 23,000 machine hours:

Y = $868,800 + (-$0.006 x 23,000)

Y = $743,200

Song, Inc, Uses the High-Low Method to Analyze Cost Behavior