Question

Rio Bus Tours has incurred the following bus maintenance costs during the recent tourist season. (The real is Brazil’s national monetary unit. On the day this exercise was written, the real was equivalent in value to .269 U.S. dollar.)

Month	Miles Traveled by Tour Buses		Cost
November	15,000		18,600		real
December	17,400		18,900
January	19,800		19,050
February	24,000		19,500
March	31,500		20,880
April	13,500		18,000

Required:

1. Use the high-low method to estimate the variable cost per tour mile traveled and the fixed cost per month.

2. Develop a formula to express the cost behavior exhibited by the company’s maintenance cost.

3. Predict the level of maintenance cost that would be incurred during a month when 44,000 tour miles are driven.

Answer 1

1)

Using the high-low method ,

variable cost per unit=(total cost of highest activity level-total cost of lowest activity level)/(highest activity level-lowest activity level)

highest activity level=31500

lowest activity level=13500

total cost of highest activity level=20880

total cost of lowest activity level=18000

variable cost per unit=(20880-18000)/(31500-13500)=0.16 real

total fixed cost=total cost-total variable cost

apply this to the highest activity level

total cost for highest activity level=20880

total variable cost for highest activity level=0.16*31500=5040 real

total fixed cost=20880-5040=15840 real

2)

formula to express the cost behavior is y=15840+0.16x

y is the total cost for any activity level

15840 real is the fixed cost for any activity level

0.16x is the total variable cost for any activity level,x is the activity level

3)

maintenance cost that would be incurred during a month when 44,000 tour miles are driven is 22840 real

y=15840+0.16x

here x=44000

y=15840+(0.16*44000)=22840 real