The maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget.Examination of past records disclosed the following costs and volume measures: Highest and Lowest: Cost per month $20,000 and $14,000;Machine hours 55,000 and 35,000.
Using the high-low technique,estimate the annual fixed cost for maintenance expenditures:
A)$42,000.
B)$40,000.
C)$30,000.
D)$44,000.
E)$38,000

Question

Quizplus · Accepted Answer

The fixed cost is the cost that does not change with the level of activity. In this case, the fixed cost is the cost that is incurred even when there are no machine hours. The high-low technique is a method of estimating the fixed cost by taking the difference between the highest and lowest costs and dividing by the difference between the highest and lowest levels of activity. In this case, the fixed cost is $20,000 - $14,000 = $6,000. The annual fixed cost is $6,000 x 12 = $72,000.

The Maintenance Expenses of a Company Are to Be Analyzed