Swan, Inc.uses the high-low method to analyze cost behavior.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 was still within the relevant range, the average total cost per machine hour was $30.40. On the basis of this information, the ﬁxed cost for Swan was:
A)$184,800.
B)$210,000.
C)$550,000.
D)$734,800.
E)$760,000.

Question

Quizplus · Accepted Answer

Using the high-low method, we can determine the variable cost per machine hour by taking the difference in total cost ($33.40 - $30.40 = $3) and dividing it by the difference in machine hours (25,000 - 22,000 = 3,000). This gives us a variable cost of $1 per machine hour.

To calculate the fixed cost, we can use either the high or low activity level and subtract the variable cost per machine hour multiplied by the activity level. Using the high activity level (25,000 machine hours), we have:

Total cost = Fixed cost + (Variable cost per machine hour x Activity level)
$30.40 per machine hour x 25,000 machine hours = $760,000
$760,000 = Fixed cost + ($1 per machine hour x 25,000 machine hours)
$760,000 = Fixed cost + $25,000
Fixed cost = $760,000 - $25,000
Fixed cost = $735,000

Therefore, the best choice is C) $550,000.

Swan, IncUses the High-Low Method to Analyze Cost Behavior