Question

Oak Island Amusements Center provides the following data on the costs of maintenance and the number of visitors for the last three years:

Number of Visitors per Year: (thousands) Maintenance Costs ($000)

1,895 $ 5,020

2,075 5,497

3,275 8,470

Required:

(a) Use the high-low method to estimate the fixed cost of maintenance annually and the variable cost of maintenance per visitor. (Enter your answers in dollars not in thousands of dollars.Round your variable cost answer to 2 decimal places.)

(b) The company expects a record 2,200,000 visitors next year. What would be the estimated maintenance costs? (Enter your answers in dollars not in thousands of dollars.)

Answer 1

Answer:- a)-Variable Cost per visitor=$2.5 per visitor

Fixed costs =$282500

b)- Estimated maintenance costs =Variable cost+ Fixed cost

=(2200000 visitors*$2.5 per visitors+$282500

=$5500000+282500 =$5782500

Explanation:-

High-Low Method:-

Variable cost per unit (x) is calculated using the following formula:

Variable cost per unit=a2-a1/b2-b1

Where,
a2 is the total cost at highest level of activity;
a1 is the total cost at lowest level of activity;
b2 are the number of units at highest level of activity; and
b1 are the number of units at lowest level of activity

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = a2 – x*b2 = a1 – x*b1

We have,
at highest activity: b₂ = 3275; a₂ = $8470
at lowest activity: b₁ = 1895; a₁ =$5020

Variable Cost of maintenance per visitor = ($8470? $5020) ÷ (3275 visitors – 1895 visitors)  

                                         = $3450/1380 visitors

                                 =$2.5 per visitors
Total Fixed Cost = $8470000? ($2.5 *3275000 visitors) = $8470000 – $8187500 =$282500