The following data relate to the Torrence Company for May and August: May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior.If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?
A)Total maintenance costs will be $1,175,000.
B)Total maintenance costs will be $1,182,000.
C)Total maintenance costs will be $1,193,000.
D)Total maintenance costs will be $1,221,000.
E)Total maintenance costs will be $1,247,000.

Question

The following data relate to the Torrence Company for May and August:  May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior.If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?
A)Total maintenance costs will be $1,175,000. 
B)Total maintenance costs will be $1,182,000. 
C)Total maintenance costs will be $1,193,000. 
D)Total maintenance costs will be $1,221,000. 
E)Total maintenance costs will be $1,247,000.

Quizplus · Accepted Answer

Step 1: Calculate the variable cost per maintenance hour:
Variable cost = (High cost - Low cost) / (High activity - Low activity)
Variable cost = ($654,000 - $458,000) / (13,000 - 10,000)
Variable cost = $66 per maintenance hour

Step 2: Calculate the fixed cost:
Fixed cost = Total cost - (Variable cost x Total maintenance hours)
Using May data:
$458,000 = Fixed cost - ($66 x 10,000)
Fixed cost = $1,118,000

Step 3: Calculate total maintenance costs for October:
Total maintenance cost = Fixed cost + (Variable cost x Estimated maintenance hours)
Total maintenance cost = $1,118,000 + ($66 x 26,000)
Total maintenance cost = $1,193,000
Therefore, the correct answer is (C) Total maintenance costs will be $1,193,000.

The Following Data Relate to the Torrence Company for May