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 is the cost formula for maintenance costs?
A)y = $0.30 X + $3,000
B)y = $3.33 X + $57,600
C)y = $0.45 X + $4,500
D)Cannot determine from the information given.

Question

Quizplus · Accepted Answer

The cost formula for maintenance costs can be determined using the high-low method. First, find the variable cost per machine hour by subtracting the lower total cost from the higher total cost, then dividing by the difference in machine hours. For January (high point) and July (low point), the calculation is ($9,000 - $7,200) / (20,000 hours - 14,000 hours) = $1,800 / 6,000 hours = $0.30 per machine hour. Next, to find the fixed cost, subtract the total variable cost at either level from the total cost at the same level. Using January's data: $9,000 - ($0.30 * 20,000) = $9,000 - $6,000 = $3,000. Thus, the cost formula is y = $0.30X + $3,000.

Runaround Corporation Sells Running Shoes and During January They Ran