Buckeye Company has provided the following data for maintenance cost:

Using the high-low method,what is the cost formula for maintenance cost?
A) $7,000 per year plus $0.625 per machine hour.
B) $7,000 per year plus $1.60 per machine hour.
C) $21,625 per year plus $0.625 per machine hour.
D) $27,000 per year plus $1.60 per machine hour.

Question

Buckeye Company has provided the following data for maintenance cost:

Using the high-low method,what is the cost formula for maintenance cost?
A) $7,000 per year plus $0.625 per machine hour. 
B) $7,000 per year plus $1.60 per machine hour. 
C) $21,625 per year plus $0.625 per machine hour. 
D) $27,000 per year plus $1.60 per machine hour.

Quizplus · Accepted Answer

To use the high-low method, we need to identify the highest and lowest levels of activity and their corresponding costs.

Using the data given:

Highest activity: 15,000 machine hours, cost of $29,000. 
Lowest activity: 6,000 machine hours, cost of $16,000.

We can then calculate the variable cost per machine hour:

Variable cost per machine hour = (highest cost - lowest cost) / (highest activity - lowest activity)
= ($29,000 - $16,000) / (15,000 - 6,000)
= $1.60 per machine hour

We can now use the variable cost per machine hour and one of the data points (either the highest or lowest) to calculate the fixed cost:

Fixed cost = Total cost - (Variable cost per machine hour x Total machine hours)

Using the lowest activity:

Fixed cost = $16,000 - ($1.60 x 6,000) 
= $7,000

Therefore, the cost formula for maintenance cost is:

Maintenance cost = $7,000 + $1.60 per machine hour

The best choice is B.

Buckeye Company Has Provided the Following Data for Maintenance Cost