Northlake, Inc., uses the high-low method to analyze cost behavior. The company observed that at 20,000 machine hours of activity, total maintenance costs averaged $10.50 per hour. When activity jumped to 24,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $9.75. On the basis of this information, the company's fixed maintenance costs were:
A) $24,000.
B) $90,000.
C) $210,000.
D) $234,000.
E) None of the other answers is correct.

Question

Quizplus · Accepted Answer

Using the high-low method, we first need to determine the variable cost per machine hour.

Variable cost per machine hour = change in total cost / change in activity level 
= ($9.75 - $10.50) / (24,000 - 20,000) 
= -$0.75 / 4,000 
= -$0.0001875

Note that the negative sign indicates an inverse relationship between activity level and total maintenance costs.

Next, we can use either the high or low point to calculate the fixed cost component. Let’s use the high point of 24,000 machine hours and its corresponding total maintenance cost of $234,000 (24,000 x $9.75).

Fixed cost = total cost - (variable cost per machine hour x activity level) 
= $234,000 - (-$0.0001875 x 24,000) 
= $234,000 + $4.50 
= $234,004.50

Rounded to the nearest thousand, the fixed maintenance costs are $90,000 (Option B).