Question

Nation’s Capital Fitness, Inc. operates a chain of fitness centers in the Washington, D.C., area. The firm’s controller is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the firm’s equipment maintenance costs must be determined. The accounting staff has suggested the use of the high-low method to develop an equation, in the form of Y = a + bX, for maintenance costs. Data regarding the maintenance hours and costs for last year are as follows:

Month	Hours of Maintenance Service				Maintenance Costs
January		530			$	4,975
February		480				4,220
March		280				2,750
April		450				4,290
May		340				3,050
June		430				4,180
July		340				3,070
August		450				3,540
September		490				4,030
October		350				3,250
November		350				3,210
December		330				3,070
Total		4,820			$	43,635
Average		402	*		$	3,636	*

*Rounded

Answer 1

Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Nation’s Capital Fitness, Inc.

	Hours	Cost
High January	530.00	$ 4,975.00
Low March	280.00	$ 2,750.00
	$ 250.00	$ 2,225.00

Variable Cost Per Hour = 2,225/250 = 8.9

Fixed Cost = 4,975 - (8.9 x 530) = $258

Equation in y = a + bx
4,975 = $258 + (8.9 x 530)