Question

Kumar Co. is attempting to predict its maintenance costs more accurately. Maintenance costs are a mixed cost. Maintenance costs and machine hours for the first four months of the year are as follows:

Month	Maintenance Costs	Machine Hours
Jan.	$8,430	1,320
Feb.	7,620	1,190
Mar.	8,810	1,430
Apr.	7,580	1,130

Required:

Using the high-low method, calculate unit variable cost and monthly fixed costs.

Answer 1

Calculation of Variable Cost per Unit:

Variable Cost per Unit = (y₂ - y₁) / (x₂ - x₁)

where y₂ = the total cost at highest level of activity = 8,810
y₁ = the total cost at lowest level of activity = 7,580
x₂ = the number of labor hours at highest level of activity = 1,430
x₁ = the number of labor hours at lowest level of activity = 1,130

So, Variable cost per unit = (8,810 - 7,580) / (1,430 - 1,130)

= 1,230 / 300 = $4.10 Ans.

Calculation of Monthly Fixed Cost: Monthly Fixed Cost = y2 − bx2 = y1 − bx1 where y2 = the total cost at highest level of activity = 8,810    y1 = the total cost at lowest level of activity = 7,580    x2 = the number of labor hours at highest level of activity = 1,430   x1 = the number of labor hours at lowest level of activity = 1,130 b = Variable cost per unit So, Monthly fixed cost = 8,810 - (4.10 * 1,430) = 7,580 - (4.10 * 1,130) =$2,947 Ans.