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			$	4,915
February		450				4,220
March		280				2,790
April		450				4,260
May		360				2,960
June		460				4,180
July		340				3,030
August		410				3,510
September		460				4,000
October		390				3,230
November		380				3,250
December		330				3,130
Total		4,840			$	43,475
Average		403	*		$	3,623	*

*Rounded

rev: 05_30_2018_QC_CS-128090

1. 4-a. Compute the variable cost per hour and the fixed cost per hour at 620 hours of activity. (Round your answers to 2 decimal places.)

1. 4-b. Why is the fixed cost per hour possibly misleading?

• Because it will not change as the number of hours changes.

• Because it will change as the number of hours changes.

Answer 1

			Hours of	Maintenance
			Maintenance	Cost
Jan -High			530	4915
March -Low			280	2790
Change			250	2125
VC per hour = Change in cost / Change in Hours
		2125 /250 = 8.50 per hour
Total fixed cost:
High cost			4915
Less: Total VC (530*8.50)			4505
Total fixed cost:			410
Total cost formula , C = 410 + 8.50X
where X is the number of maintenance hours
Req 4-a
Maintenance hours = 620 hours
Total cost of 620 hours
Variable cost (620 hrs @8.50)			5270
Fixed cost			410
Total cost of 620 hours			5680
Req 4-b:
Because it will change as the number of hours changed