Question

Denver Manufacturing Denver Manufacturing would like to do a better job budgeting for maintenance costs and, consequently, they have prepared a schedule showing maintenance costs and units produced for the past five months as follows: 1 January February March April May Number of units produced 5 ,400 6.600 4.900 5,600 6.000 Total maintenance costs $4,800 5,180 4,500 4,900 5,490 Refer to the Denver Manufacturing information above. Using the high/low method, what is the cost equation to predict total maintenance costs? Y = $90 + $.90X OY = $2,540 + $ 40X Y = $1,646 + $.5824x O Y = $2.50x - $11,320

Answer 1

First let us work out the variable cost by using high low method

It will be calculated as highest cost activity - lowest cost activity / highest cost unit - lowest cost unit

So ($5490- $4500)/ (6600-4900) I.e . 990/ 1700 which is 0.5824 per unit

Now fixed cost is calculated as highest activity cost - (variable cost per  unit * highest activity units)

So 5490 - (0.5824*6600) I.e. 5490- 3484 which is 1646

Total cost is calculated as fixed cost + variable cost

Hence the correct option is Y= $1646 + 0.5824x