Question

In the Gabbana Company, maintenance costs are a mixed cost. At the low level of activity (40 direct labor hours), maintenance costs are $600. At the high level of activity (100 direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost?

Answer 1

Answer:

(i) $8.33 per unit

(ii) $267

Explanation:

Under high-Low method:

$Variable\ cost=\frac{Cost\ at\ high\ activity-cost\ at\ low\ activity}{Highest\ activity-Lowest\ activity}$

$Variable\ cost=\frac{1,100-600}{100-40}$

$Variable\ cost=\frac{500}{60}$

                             = $8.33

Total cost = variable cost per unit + Fixed cost

1,100 = (8.33 × 100) +  Fixed cost

1,100 - 833 = Fixed cost

$267 = Fixed cost