What would be the cost equation if the high-low method is used?
A)Maintenance Costs = 9.00 $\times$ Hours of Activity
B)Maintenance Costs = 3,600 + 400 $\times$ Hours of Activity
C)Maintenance Costs = 570 + 7.50 $\times$ Hours of Activity
D)Maintenance Costs = 34.469 + .99724 $\times$ Hours of Activity

Question

Quizplus · Accepted Answer

The high-low method involves taking the highest and lowest levels of activity and using the difference in cost to calculate the variable cost per unit of activity. In this case, the highest activity level is 800 hours with a maintenance cost of $6,420, and the lowest activity level is 400 hours with a maintenance cost of $4,320. The difference in cost is $2,100, and the difference in activity is 400 hours. Therefore, the variable cost per unit of activity is $5.25.

To calculate the fixed cost, we can use either the highest or lowest activity level and solve for the fixed cost. Using the highest activity level:

$6,420 = $5.25(800) + Fixed Cost 
Fixed Cost = $570

Therefore, the cost equation using the high-low method is:

Maintenance Costs = $570 + $5.25(Hours of Activity)

Which matches option C.

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