Banff Company manufactures snowboards. The management accountant wants to calculate the fixed and variable costs associated with the leasing of machinery. Data for the past four months were collected. $\begin{array}{lrr}& & \text { Machine } \
\text { Month } &\text { Lease cost } & \text { hours }\
\text { April } & \$ 21,000 & 550 \
\text { May } & 16,500 & 420 \
\text { June } & 19,000 & 510 \
\text { July } & 22,230 & 570
\end{array}$
-Refer to the Figure.What would be Banff Company's cost formula to estimate the cost of leasing within the relevant range?
A)total lease cost = $456 + ($38.20 × machine hours)
B)total lease cost = $516 + ($38.18 × machine hours)
C)total lease cost = $420 + ($37.25 × machine hours)
D)total lease cost=$482+($61.50× machine hours)

Question

Quizplus · Accepted Answer

To find the cost formula, we need to calculate the variable cost per machine hour and the fixed cost. Using any two months to calculate the variable cost per machine hour, we can use April and May: $$ \frac{(\$21,000 - \$16,500)}{(550 - 420)} = \frac{\$4,500}{130} = \$34.62 $$ per machine hour. This calculation doesn't match any of the options directly, indicating a mistake in my calculation. Let's correct the approach by choosing the correct method to find the variable cost per machine hour and the fixed cost accurately.Given the mistake in the initial calculation, let's correctly identify the variable cost per machine hour using the high-low method correctly:1. Identify the highest and lowest activity levels and their associated costs. Here, the highest is July (570 hours, $22,230) and the lowest is May (420 hours, $16,500).2. Calculate the variable cost per machine hour (VCMH) using the formula: $$ VCMH = \frac{(High\ Cost - Low\ Cost)}{(High\ Activity - Low\ Activity)} $$$$ VCMH = \frac{(\$22,230 - \$16,500)}{(570 - 420)} = \frac{\$5,730}{150} = \$38.20 $$3. Calculate the fixed cost (FC) by subtracting the total variable cost at either level from the total cost at that level. Using the variable cost per machine hour found, we can use any month, for example, May:$$ FC = Total\ Cost - (VCMH \times Activity) $$$$ FC = \$16,500 - (\$38.20 \times 420) $$$$ FC = \$16,500 - \$16,044 = \$456 $$Thus, the cost formula is: total lease cost = $456 + ($38.20 × machine hours), which matches option A. My initial calculation was incorrect due to a computational error, and the correct approach is to use the high-low method as described.

Banff Company Manufactures Snowboards -Refer to the Figure