Bava Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $\begin{array}{llr}& \text { Direct } & \text { Maintenance } \
\text { Month } & \text { Labour Hours } & \text { Costs Incurred }\
\text { June } & 4,000 & \$ 900 \
\text { July } & 6,500 & 1,325 \
\text { August } & 7,000 & 1,500 \
\text { September } & 5,500 & 1,150
\end{array}$ Using the high-low method, what is the variable maintenance cost per direct labour hour?
A) $1.00
B) $0.10
C) $0.20
D) $1.50

Question

Quizplus · Accepted Answer

The high-low method involves taking the highest and lowest activity levels and using them to calculate the variable cost per unit. The formula is: $$ \text{Variable Cost per Unit} = \frac{\text{Cost at High Activity Level} - \text{Cost at Low Activity Level}}{\text{High Activity Level} - \text{Low Activity Level}} $$Using the highest activity level (7,000 hours in August with a cost of $1,500) and the lowest activity level (4,000 hours in June with a cost of $900), the calculation is: $$ \frac{1,500 - 900}{7,000 - 4,000} = \frac{600}{3,000} = 0.20 $$Therefore, the variable maintenance cost per direct labour hour is $0.20.

Bava Company Wants to Develop a Cost Function for Its