Spokane Corporation found its maintenance cost and sales dollars to be somewhat correlated. Last year's high and low observations were as follows: $$\begin{array} { c c }
\text { Maintenance Cost } & \text { Sales } \
\$ \$ 46,000 & \$ 600,000 \
\$ 52,000 & \$ 800,000
\end{array}$$ What is the fixed portion of the maintenance cost?

Question

Spokane Corporation found its maintenance cost and sales dollars to be somewhat correlated. Last year's high and low observations were as follows: $$\begin{array} { c c } 
\text { Maintenance Cost } & \text { Sales } \
\$ \$ 46,000 & \$ 600,000 \
\$ 52,000 & \$ 800,000
\end{array}$$ What is the fixed portion of the maintenance cost?

Quizplus · Accepted Answer

To find the fixed portion of the maintenance cost, we first calculate the variable cost per unit of sales (in this case, dollars of sales). The change in maintenance cost is $52,000 - $46,000 = $6,000. The change in sales is $800,000 - $600,000 = $200,000. The variable cost per dollar of sales is $6,000 / $200,000 = $0.03 per dollar of sales.Next, we use either the high or low point to calculate the fixed cost. Using the high point:$$ \text{Fixed Cost} = \text{Total Cost} - (\text{Variable Cost per Dollar of Sales} \times \text{Sales}) $$$$ \text{Fixed Cost} = \$52,000 - (\$0.03 \times \$800,000) $$$$ \text{Fixed Cost} = \$52,000 - \$24,000 $$$$ \text{Fixed Cost} = \$28,000 $$Therefore, the fixed portion of the maintenance cost is $28,000.

Spokane Corporation Found Its Maintenance Cost and Sales Dollars to Be