Answer:
1. Variable cost = $0.125/mile and Fixed cost = $16,225
2. x = $16,225 + $0.125 × y
3. total maintenance cost = $21,600
Explanation:
Requirement 1
We know,
Variable cost using high-low method = (Total highest cost - Total lowest cost) ÷ (Highest activity - Lowest activity)
Given,
Highest activity = 31,400 miles (March)
Lowest activity = 13,400 miles (April)
Total highest cost = $20,150 (March)
Total lowest cost = $17,900 (April)
Therefore,
Variable cost using high-low method = ($20,150 - $17,900) ÷ (31,400 - 13,400) miles
Variable cost using high-low method = $2,250 ÷ 18,000 miles
Variable cost using high-low method = $0.125 per mile
Again,
we know, Total cost = Fixed cost + Variable cost
Using highest total cost and highest activities,
$20,150 = Fixed cost + $0.125 × 31,400 miles
or, $20,150 = Fixed cost + $3,925
or, Fixed cost = $20,150 - $3,925
Fixed cost = $16,225
Requirement 2 and 3
Requirement 2
The formula to express the cost behavior exhibited by the company's maintenance cost =
Let,
Total cost = x
Traveled by Tour Buses = y
As the fixed cost is fixed, the formula to express the answer =
x = $16,225 + $0.125 × y
It means, total cost = fixed cost + variable cost per miles driven.
Requirement 3
The level of maintenance cost that would be incurred during a month when 43,000 tour miles are driven =
total cost = fixed cost + variable cost per miles driven.
or, total cost = $16,225 + $0.125 × 43,000 miles
Total cost = $16,225 + $5,375
Therefore, total maintenance cost = $21,600
