Song Inc., uses the high-low method to analyze cost behaviour. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which is still within the relevant range, the total maintenance costs averaged $30.40 per machine hour. On the basis of this information, the variable cost per machine hour is:
A)$8.40.
B)$22.00.
C)$25.00.
D)$30.40.
E)$33.40.

Question

Quizplus · Accepted Answer

The variable cost per machine hour is the difference between the total maintenance costs at the high and low levels of activity, divided by the difference in activity levels. In this case, the variable cost per machine hour is ($33.40 - $30.40) / (25,000 - 22,000) = $8.40.

Song Inc, Uses the High-Low Method to Analyze Cost Behaviour