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)
	1,905		$	2,937
	2,085			3,216
	4,200			6,150

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 "Variable cost" answer to 2 decimal places.)

Variable cost per visitor	$$
Annual fixed cost	$$

b. The company expects a record 2,400,000 visitors next year. What would be the estimated maintenance costs? (Enter your answer in dollars not in thousands of dollars.)

Estimated maintenance costs $

Answer 1

Answer.

The high-low method focuses only on two points: the highest and lowest activity levels.

At the highest activity x₂ is 4,200,000 visitors per year and maintenance cost y₂ is $6,150,000

At the lowest activity x₁ is 1,905,000 visitors per year and maintenance cost y1 is $2,937,000

So the variable cost of maintenance per visitor =

y₂ – y_{1 /} x₂ - x₁

= 6,150,000-2,937,000 / 4,200,000-1,905,000

= $1.4 per visitor

Total Fixed Cost = y₂ – bx₂ = y₁ – bx₁

                                = 6150000 – (1.4 $ * 4200000)=2937000 – (1.4$ * 1905000)

                                = $270,000

b) Estimated maintenance costs when the visitors are 2400000 is $ 3,630,000 which is 1.4$ * 2,400,000 + 270,000.