Question

Average maintenance costs are $1.50 per machine-hour at an activity level of 8,000 machine-hours and $1.20 per machine-hour at an activity level of 13,000 machine-hours. assuming that this activity is within the relevant range, total expected maintenance cost for a budgeted activity level of 10,000 machine-hours would be closest to:

Answer 1

We solve this problem by assuming that the relation is linear. With that, the slope m must be constant with x = machine hours and y = average maintenance costs, therefore

m = (13,000 – 8,000) / ($1.20 - $1.50) = (13,000 – 10,000) / ($1.20 – X)

($1.20 – X) = ($1.20 - $1.50) * (13,000 – 10,000) / (13,000 – 8,000)

$1.20 – X = - $0.30 * 3,000 / 5,000

$1.20 – X = - 0.18

X = $1.38

Therefore total expected maintenance cost is:

Total maintenance cost = $1.38 * 10,000

Total maintenance cost = $13,800

Therefore the answer is closest to the value of $13,440.