Given below are the costs and activity observations for Ncwin Company's maintenance costs. Using the high-low method,what is Ncwin's monthly fixed costs for maintenance?
A)$11,250
B)$4,550
C)$3,750
D)$2,650

Question

Given below are the costs and activity observations for Ncwin Company's maintenance costs.  Using the high-low method,what is Ncwin's monthly fixed costs for maintenance?
A)$11,250 
B)$4,550 
C)$3,750 
D)$2,650

Quizplus · Accepted Answer

First, we need to determine the variable cost per unit of activity.

Highest level of activity: 9,000 machine hours, Maintenance cost: $19,800 
Lowest level of activity: 3,000 machine hours, Maintenance cost: $9,300

Variable cost per unit = (Cost at highest activity level - Cost at lowest activity level) / (Highest activity level - Lowest activity level)
= ($19,800 - $9,300) / (9,000 - 3,000)
= $10,500 / 6,000
= $1.75 per machine hour

Next, we can use either the high or the low data point to solve for the fixed cost. Let's use the high point.

Maintenance Cost at highest activity level = Fixed cost + (Variable cost per unit x Highest activity level)
$19,800 = Fixed cost + ($1.75 x 9,000)
$19,800 = Fixed cost + $15,750
Fixed cost = $19,800 - $15,750
Fixed cost = $4,050

Therefore, the monthly fixed cost for maintenance is $3,750 (rounded to the nearest dollar).

Given Below Are the Costs and Activity Observations for Ncwin