Question

	Machine-Hours	Maintenance Cost
March	4,440	$50,950
April	4,431	$50,877
May	4,412	$50,696
June	4,460	$51,113
July	4,414	$50,711
August	4,433	$50,900
September	4,443	$50,976
October	4,415	$50,730
November	4,391	$50,530

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

Using the high-low method, calculate

Variable cost per machine-hour?

Fixed cost per month?

What would total costs be for a month with 4,000 machine-hours?

Answer 1

In high low two point method we use the highest and lowest activity level costs to find out the variable cost and fixed cost.

1. Calculation of Variable cost per machine hour

Highest point of activity is in the month of June with 4460 Machine hours and lowest level of activity is in the month of November with 4391 machine hours.

Variable cost per machine hour =(Cost at highest level of activity- cost at lowest level of activity) / (High activity Level - Low Activity Level) =($51113 - $50530) / (4460 - 4391) =$583/69 =$8.45 per machine hour

2.Calculation of monthly Fixed cost

Fixed Cost can be find out by either using the high point or low point and both will give the same answer

Fixed cost = Total cost – (Variable cost per machine hour x Activity level)

Fixed cost Using highest point of activity = $51113– ($8.45 x 4460) = $13426

Fixed cost using lowest point of activity = $50530– ($8.45 x 4391) = $13426(rounded off)

Both are giving the same answer.

Therefore, Fixed cost per month =$13426

3. Calculation of Total cost for a month at 4000 machine hours

Total cost = Fixed cost + Variable cost for = $13426 + ($8.45 x 4000 hour) = $13426+ $33800 = $47226