Bell Company has provided the following data for maintenance costs: Using the high-low method,the cost formula for maintenance cost is?
A) $1.625 per machine hour.
B) $2.00 per machine hour.
C) $18,000 plus $0.50 per machine hour.
D) $24,000 plus $0.50 per machine hour.

Question

Bell Company has provided the following data for maintenance costs:  Using the high-low method,the cost formula for maintenance cost is?
A) $1.625 per machine hour. 
B) $2.00 per machine hour. 
C) $18,000 plus $0.50 per machine hour. 
D) $24,000 plus $0.50 per machine hour.

Quizplus · Accepted Answer

To use the high-low method, we need to identify the highest and lowest volume of machine hours and the corresponding maintenance costs. Using the data provided, we can see that the highest volume of machine hours is 12,000 with a maintenance cost of $24,000, while the lowest volume of machine hours is 6,000 with a maintenance cost of $15,000.

Using these two points, we can calculate the variable cost per machine hour:

Variable cost per machine hour = (highest cost - lowest cost) / (highest volume - lowest volume) = ($24,000 - $15,000) / (12,000 - 6,000) = $0.50 per machine hour

Next, we need to calculate the fixed cost component of the cost formula:

Fixed cost = highest cost - (variable cost per machine hour x highest volume) = $24,000 - ($0.50 x 12,000) = $18,000

Therefore, the cost formula for maintenance cost is: 
Total maintenance cost = $18,000 + ($0.50 x machine hours)

So the best choice is C.

Bell Company Has Provided the Following Data for Maintenance Costs