Question

Nation’s Capital Fitness, Inc. operates a chain of fitness centers in the Washington, D.C., area. The firm’s controller is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the firm’s equipment maintenance costs must be determined. The accounting staff has suggested the use of an equation, in the form of Y = a + bX, for maintenance costs. Data regarding the maintenance hours and costs for last year are as follows:

Month	Hours of Maintenance Service				Maintenance Costs
January		540			$	4,800
February		460				4,240
March		290				2,800
April		470				4,290
May		310				2,970
June		460				4,140
July		340				3,010
August		440				3,500
September		480				4,000
October		350				3,270
November		350				3,190
December		340				3,120
Total		4,830			$	43,330
Average		403	*		$	3,611	*

Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Nation’s Capital Fitness, Inc. Express the cost behavior pattern in equation form. (Round coefficient of X to 2 decimal places and other answer to the nearest whole dollar amount.)

Monthly Maintenance Cost =

Variable Maintenance Cost per hour =

Compute the predicted maintenance cost at 620 hours of activity.

Maintenance Cost =

1. Compute the variable cost per hour and the fixed cost per hour at 630 hours of activity. (Round your answers to 2 decimal places.)

Variable Cost per hour =

Fixed Cost per hour =

1. Why is the fixed cost per hour possibly misleading?

multiple choice

• Because it will change as the number of hours changes.

• Because it will not change as the number of hours changes.

Answer 1

Ans. 1

The high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Nation’s Capital Fitness, Inc. Express the cost behavior pattern in equation form.

	Hours	Cost
High in January	540	$4,800
Low in March	290	$2,800
Difference	250	$2,000

Variable Cost Per Unit=Difference in Total Costs / Difference in Hours

Variable Cost Per Unit=$2,000 / $250=$8 per unit

Variable Cost Per Unit=$8 per unit

Fixed Cost=Total Costs - Variable Costs

Fixed Cost=$4,800 - ($8 x 540)

Fixed Cost=$4,800 - $4,320

Fixed Cost=$480

The cost behavior pattern in equation form.

Y= a + b X, Where

X= Maintenance Hours

Y=Maintenance Cost

a=Fixed Cost

b=Variable Cost

Hence, Y=a+b X

Y=$480 + 8 X

Monthly Maintenance Cost

$480

+

$8

X

Ans. 2

Variable Maintenance Cost

$8 per hour

Ans. 3

Compute the predicted maintenance cost at 620 hours of activity.

Y=a+b X

Y=$480 + ($8 x 620 hours)

Y=$480 + $4,960

Y=$5,440

Maintenance Cost

$5,440

Ans. 4

Compute the variable cost per hour and the fixed cost per hour at 630 hours of activity.

Variable Cost per hour	$5,040
Fixed Cost per hour	$480

Working Notes:

Variable Cost per hour=$8 x 630 hours=$5,040

Fixed Cost per hour=$480

4.b Why is the fixed cost per hour possibly misleading?

Ans. The fixed cost per hour possibly misleading. Because it will not change as the number of hours changes.