Question

Lexington Pharmaceuticals, Inc. was incorporated in the province of British Columbia on October 28, 2011. After gathering manufacturing-related costs over a period of several years, the company determined that machine hours were the best predictor of the company’s maintenance costs. Allison Forsythe, the company’s Chief Financial Officer, is studying the following report relating to the company’s maintenance costs and machine hours usage for the twelve months of the preceding year:

Month	Machine Hours	Total Cost
January	4,500	$34,645
February	5,400	$40,612
March	6,400	$47,242
April	5,200	$39,286
May	4,300	$33,319
June	4,400	$33,982
July	6,800	$49,894
August	4,200	$32,656
September	7,600	$55,198
October	6,200	$45,916
November	5,900	$43,927
December	6,300	$46,579

Required: Please answer the following questions using the high-low method:

1. What is the variable maintenance cost per machine hour? 5 marks

2. What is the fixed cost of maintenance each month? 5 marks

3. What is the mixed cost formula for the company’s maintenance cost? 5 marks

4. If Lexington uses 4,800 machine hours in a month, what will its total maintenance cost be for that month? 5 marks

Answer 1

Required 1 :
	Machine hours	Maintenance cost
High level of activity ( September )	7600	55198
(-) Low level of activity ( August )	4200	32656
Difference	3400	22542

Difference in maintenance cost	22542
(/) Difference in Machine hours	3400
Variable maintenance cost per machine hour	6.63

Required 2 :
Now let us calculate the fixed maintenance cost using the information of high level of activity
Total maintenance cost = ( Machine hours * Variable maintenance cost per machine hours ) + Fixed maintenance cost
55198 = ( 7600 * 6.63 ) + Fixed maintenance cost
55198 = 50388 + Fixed maintenance cost
Fixed maintenance cost = 55198 - 50388 =	4810

Required 3 :

Cost formula for maintenance :

Y = 4810 + 6.63X

Here, Y is total maintenane cost and X is machine hours

Required 4 :
Total maintenance cost = 4810 + 6.63 * 4800	36634