Runaround Corporation sells running shoes and during January they ran production machines for 20,000 hours total and incurred $9,000 in maintenance costs. During July they ran production machines for 14,000 hours total and incurred $7,200 in maintenance costs. Based on this data, what are the fixed costs?
A)$6,000
B)$3,000
C)$9,000
D)$57,600

Question

Quizplus · Accepted Answer

To find the fixed costs, we need to use the high-low method. 
First, we need to find the variable cost per hour:
Variable cost per hour = (July maintenance costs - January maintenance costs) / (July hours - January hours)
Variable cost per hour = ($7,200 - $9,000) / (14,000 - 20,000)
Variable cost per hour = -$0.30 (The negative sign indicates an inverse relationship between hours and maintenance costs, which is expected for variable costs)

Next, we can use either January or July data to find the fixed costs:
Fixed costs = Total cost - (Variable cost per hour x Total hours)
Using January data:
Fixed costs = $9,000 - (-$0.30 x 20,000) = $9,000 + $6,000 = $15,000
Using July data:
Fixed costs = $7,200 - (-$0.30 x 14,000) = $7,200 + $4,200 = $11,400

Since different months give us different fixed cost values, we need to use judgment to determine which value is more reasonable. In this case, we can see that 20,000 hours is much closer to the annual total hours than 14,000 hours. Therefore, the fixed cost estimate of $15,000 based on January data is more reasonable than $11,400 based on July data. 
Thus the fixed costs are $15,000, and the best choice is B.

Runaround Corporation Sells Running Shoes and During January They Ran