Question

Winston Company’s high and low level of activity last year was 60,000 units produced in April and 20,000 units produced in December. Machine maintenance costs were $52,000 in April and $20,000 in December. Using the high-low method, estimated total maintenance cost for a month in which 40,000 units will be produced is :
$40,000.
$34,667.
$36,000.
not determinable with the information given.

Answer 1

Answer:

$36,000.

Explanation:

The computation of the fixed cost and the variable cost per hour by using high low method is shown below:

Variable cost per hour = (High Machine maintenance costs - low Machine maintenance costs) ÷ (High activity level - low activity level)

= ($52,000 - $20,000) ÷ (60,000 units - 20,000 units)

= $32,000 ÷ 40,000 units

= $0.8

The variable cost equal to

= High activity level × per unit variable cost

=  60,000 units × 0.8

= $48,000

So, the fixed cost would be

= Total cost - variable cost

= $52,000 - $48,000

= $4,000

For 40,000 units, total maintenance cost would be

= Number of units  × per unit variable cost + Fixed cost

= 40,000 units × $0.8 + $4,000

= $32,000  + $4,000

=$36,000