Question

Runaround Corporation sells running shoes and during January they ran production machines for 28,000 hours total and incurred $ 15,000 in maintenance costs. During July they ran production machines for 13,000 hours total and incurred $ 8,800 in maintenance costs.   Based on this​ data, what is the cost formula for maintenance​ costs? (Round intermediary calculations to the nearest​ cent.) A. y​ = $ 1.87 X​ + $ 40 comma 610 B. y​ = $ 0.41 X​ + $ 3 comma 520 C. y​ = $ 0.59 X​ + $ 15,000 D. Cannot determine from the information given.  

Answer 1

Using high low method,

Variable cost per unit = (y₂ – y₁)/(x₂ – x₁)

Total cost at highest activity level = $ 15,000

Total cost at lowest activity level = $ 8,800

Total hours at highest activity level = 28,000 hours

Total hours at lowest activity level = 13,000 hours

Variable cost per unit = ($ 15,000 – $ 8,800)/ (28,000 – 13,000)

                                = $ 6,200/15,000

                                = $ 0.41333 or $ 0.41

Fixed cost can be computed using VC per unit using any production level as:

Total cost = Fixed cost + Variable cost

$ 15,000 = Fixed cost + $ 0.41 x 28,000

$ 15,000 = Fixed cost + $ 11,480

Fixed cost = $ 15,000 - $ 11,480 = $ 3,520

Cost formula can be furnished as:

Total cost = (Variable cost x No of units) + Fixed cost

If X is no. of units and y is total cost, cost formula for maintenance cost is:

y = $ 0.41 X + $ 3,520

Hence option “B. y = $ 0.41 X + $ 3,520” is correct answer.