Smith Company is attempting to develop the cost function for repair costs. The following past data are available: $\begin{array}{lr}\text { Machine Hours }&\text {Repair Costs }\
4,800 & \$ 6,385 \
3,400 & 4,585 \
4,000 & 5,285 \
5,900 & 7,085
\end{array}$ Using the high-low method, what is the fixed repair cost?
A) $1,185
B) $850
C) $475
D) $565

Question

Quizplus · Accepted Answer

The fixed repair cost is the cost that does not change with the level of activity. In this case, the fixed repair cost is the cost of the repair crew and their equipment. The high-low method is a method of estimating the fixed and variable costs of a cost function. The high-low method uses the highest and lowest levels of activity to estimate the fixed and variable costs. In this case, the highest level of activity is 5,900 machine hours and the lowest level of activity is 3,400 machine hours. The difference in the repair costs between the highest and lowest levels of activity is $2,500. The difference in the machine hours between the highest and lowest levels of activity is 2,500 machine hours. The fixed repair cost is the repair cost at the lowest level of activity minus the variable repair cost per machine hour times the difference in the machine hours between the highest and lowest levels of activity. The variable repair cost per machine hour is $2,500 / 2,500 machine hours = $1.00 per machine hour. The fixed repair cost is $4,585 - $1.00 per machine hour * (5,900 machine hours - 3,400 machine hours) = $1,185.

Smith Company Is Attempting to Develop the Cost Function for Repair