(Appendix 2A)Donner Company would like to estimate the variable and fixed components of its maintenance costs and has compiled the following data for the last five months of operations. Using the high-low method of analysis, the estimated total fixed cost per month for maintenance is closest to:
A)$440
B)$407
C)$470
D)$0

Question

(Appendix 2A)Donner Company would like to estimate the variable and fixed components of its maintenance costs and has compiled the following data for the last five months of operations.  Using the high-low method of analysis, the estimated total fixed cost per month for maintenance is closest to:
A)$440 
B)$407 
C)$470 
D)$0

Quizplus · Accepted Answer

Using the high-low method, we calculate the variable cost per maintenance hour to be:
Variable cost per maintenance hour = (Cost at highest activity level - Cost at lowest activity level) / (Hours at highest activity level - Hours at lowest activity level)
= (3,270 - 2,880) / (1,500 - 1,000)
= $0.78/hour

Next, we use the variable cost per maintenance hour and either the highest or lowest activity level to calculate the total fixed cost per month:
Total fixed cost per month = Total cost at either activity level - (Variable cost per maintenance hour x Hours at that activity level)

Using the data from the table, we can see that the cost at the highest activity level (3,270) is likely due to some outlier or special circumstance, since the cost per hour is higher than for the other months. Therefore, we will use the lowest activity level to calculate the total fixed cost per month:
Total fixed cost per month = 2,880 - (0.78 x 1,000)
= $240
Therefore, the estimated total fixed cost per month for maintenance is closest to option B) $407, which is the only option within a reasonable range of the calculated value.

(Appendix 2A)Donner Company Would Like to Estimate the Variable and Fixed