Question

Coronado Industries’s high and low level of activity last year was 52000 units of product produced in May and 21000 units produced in November. Machine maintenance costs were $147200 in May and $66600 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45000 units.

a) $135100

b) $135200

c) $126000

d) $129000

Answer 1

Answer: option d $129,000

Working:

Under high-low point method:

Variable cost per unit = (highest activity cost - lowest activity cost)/ (highest activity units - lowest activity units)

Cost at highest level of activity	147,200
Cost at lowest level of activity	66,600
Highest level of activity	52,000
Lowest level of activity	21,000
Variable cost per unit = (147,200 – 66,600)/(52,000 – 21,000)
Variable cost per unit = $80,600/31,000
Variable cost per unit = $2.6

Total fixed cost = $147,200 - (52,000 x $2.6)= $12,000

So, for production of 45000 units

Total maintenance costs = (45,000x $2.6) + $12,000

                                          = $129,000