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 of activity first.

Variable cost per unit = (Cost at high activity level - Cost at low activity level) ÷ (High activity level - Low activity level)

Variable cost per unit = ($16,500 - $11,000) ÷ (4,500 - 3,000) = $5

Next, we can use either the high or low activity level with the variable cost per unit to estimate the fixed cost. Let's use the high activity level:

Fixed cost = Total cost - (Variable cost per unit x Activity level)

Fixed cost = $16,500 - ($5 x 4,500) = $13,000

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