Buckeye Company has provided the following data for maintenance cost: The best estimate of the cost formula for maintenance would be:
A)$21,625 per year plus $0.625 per machine hour
B)$7,000 per year plus $0.625 per machine hour
C)$7,000 per year plus $1.60 per machine hour
D)$27,000 per year plus $1.60 per machine hour

Question

Buckeye Company has provided the following data for maintenance cost:  The best estimate of the cost formula for maintenance would be:
A)$21,625 per year plus $0.625 per machine hour 
B)$7,000 per year plus $0.625 per machine hour 
C)$7,000 per year plus $1.60 per machine hour 
D)$27,000 per year plus $1.60 per machine hour

Quizplus · Accepted Answer

Using the high-low method:

High level of activity: 14,000 hours, $32,200
Low level of activity: 4,000 hours, $13,200

Variable cost per hour = (High cost – Low cost) / (High level – Low level)
= (32,200 – 13,200) / (14,000 – 4,000)
= 19,000 / 10,000
= $1.90 per hour

Fixed cost = Total cost – (Variable cost per hour x Total machine hours)
= 32,200 – (1.90 x 14,000)
= $7,000 per year

So, the best estimate of the cost formula for maintenance is $7,000 per year plus $1.60 per machine hour, which is closest to option C.

Buckeye Company Has Provided the Following Data for Maintenance Cost