Kane Ltd. found its maintenance cost and sales revenues to be somewhat correlated. Last year's high and low observations were as follows: $$\begin{array} { c c }
\text { Maintenance Cost } & \text { Sales } \
£ 36,000 & £ 400,000 \
£ 42,000 & £ 600,000
\end{array}$$ What is the fixed portion of the maintenance cost?
A)£24,000
B)£42,000
C)£30,000
D)£12,000

Question

Kane Ltd. found its maintenance cost and sales revenues to be somewhat correlated. Last year's high and low observations were as follows: $$\begin{array} { c c } 
\text { Maintenance Cost } & \text { Sales } \
£ 36,000 & £ 400,000 \
£ 42,000 & £ 600,000
\end{array}$$ What is the fixed portion of the maintenance cost?
A)£24,000
B)£42,000
C)£30,000
D)£12,000

Quizplus · Accepted Answer

To find the fixed portion of the maintenance cost, we first calculate the variable cost per unit of sales. The change in maintenance cost is £6,000 (£42,000 - £36,000), and the change in sales is £200,000 (£600,000 - £400,000). The variable cost per unit of sales is £6,000 / £200,000 = £0.03 per £1 of sales.Next, we use either the high or low point to calculate the fixed cost. Using the high point:Fixed Cost = Total Cost - (Variable Cost per Unit × Number of Units)Fixed Cost = £42,000 - (£0.03 × £600,000) = £42,000 - £18,000 = £24,000.

Kane Ltd Found Its Maintenance Cost and Sales Revenues to Be