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, what were total maintenance costs when Swan experienced 23,000 machine hours?
A)$193,200.
B)$550,000.
C)$734,800.
D)$743,200.
E)$760,000.

Question

Quizplus · Accepted Answer

Using the high-low method formula, we can calculate the variable cost per hour:

Variable cost per hour = (Cost at high activity level - Cost at low activity level) / (High activity level - Low activity level)
Variable cost per hour = ($30.40 - $33.40) / (25,000 - 22,000)
Variable cost per hour = -$3 / 3,000
Variable cost per hour = -$0.001 per machine hour (notice this is negative, which means that the cost decreases as activity increases)

Next, we can use either the high or low activity level and the variable cost per hour to calculate the fixed cost component:

Fixed cost component = Total cost - (Variable cost per hour x Total machine hours)
$33.40 = Total cost - (-$0.001 x 22,000)
Total cost = $33.40 + $22 = $55.40

Now we can use the fixed and variable cost components to estimate total maintenance costs at 23,000 machine hours:

Total maintenance cost at 23,000 machine hours = Fixed cost component + (Variable cost per hour x 23,000)
Total maintenance cost at 23,000 machine hours = $55.40 + (-$0.001 x 23,000)
Total maintenance cost at 23,000 machine hours = $55.40 - $23 = $32.40 per machine hour
Total maintenance cost at 23,000 machine hours = $32.40 x 23,000 = $745,200

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