Average maintenance costs are $1.50 per machine hour at an activity level of 8,000 machine hours and $1.20 per machine hour at an activity level of 13,000 machine hours.Assuming that this activity is within the relevant range,total expected maintenance cost for a budgeted activity level of 10,000 machine hours would be closest to which of the following?

Question

Quizplus · Accepted Answer

Using the high-low method, we can calculate the variable cost per machine hour as follows:
Variable cost per machine hour = (Total maintenance cost at high level – Total maintenance cost at low level) / (High level of activity – Low level of activity)
Variable cost per machine hour = ($1.20 - $1.50) / (13,000 - 8,000)
Variable cost per machine hour = -$0.06 per machine hour
Note: The negative result indicates a decreasing cost per machine hour as the activity level increases.
Using the cost formula, we can calculate the total maintenance cost for 10,000 machine hours as follows:
Total maintenance cost = Fixed cost + (Variable cost per machine hour x Activity level)
Total maintenance cost = $1.50 per machine hour x 10,000 machine hours + $0.06 per machine hour x 10,000 machine hours
Total maintenance cost = $15,000 + $600
Total maintenance cost = $15,600
Therefore, the closest total expected maintenance cost for a budgeted activity level of 10,000 machine hours is $13,440 (option B).

Average Maintenance Costs Are $1