Question

The following data pertains to activity and maintenance cost for two recent periods: Activity level (units) 5,000 4,000 Maintenance cost $16,750 $15,000 Maintenance cost is a mixed cost with both fixed and variable components. The cost formula for maintenance using the high-low method is____________.

Answer 1

Answer:

TC =FC + VC (Q)

$16750 = $8,000 + 1.75 (6,000)

Explanation:

Using high Low method calculate variable cost from following formula:

Variable cost = ( Higher Maintenance cost - Lower Maintenance cost ) / ( Higher activity level - Lower activity level )

Variable cost = ( $16,750 - $15,000 ) / ( 5,000 - 4,000 )

Variable cost = $1,750 / 1,000

Variable cost = $1.75 per activity

Fixed Cost = $16,750 - ( 5,000 x 1.75)

Fixed Cost = $16,750 - 8,750

Fixed Cost = $8,000

Cost Equation formula is

TC =FC + VC (Q)

$16750 = $8,000 + 1.75 (6,000)

TC =Total Cost

FC =total Fixed Cost

VC = Variable Cost per unit

Q =Quantity