The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming year.The cost behavior pattern of the maintenance costs must be determined.The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs.Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted) Using the high-low method to estimate cost behavior,420 maintenance hours in a month would mean the maintenance costs would be budgeted at:
A)$3,150.
B)$3,600.
C)$3,720.
D)$3,780.

Question

The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming year.The cost behavior pattern of the maintenance costs must be determined.The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs.Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)  Using the high-low method to estimate cost behavior,420 maintenance hours in a month would mean the maintenance costs would be budgeted at:
A)$3,150. 
B)$3,600. 
C)$3,720. 
D)$3,780.

Quizplus · Accepted Answer

Using the regression equation y = a + bx, the equation for maintenance costs is: 
y = 540 + 7x 
where y is the total maintenance cost and x is the number of maintenance hours. 
To estimate the cost for 420 maintenance hours: 
y = 540 + 7(420) 
y = 540 + 2940 
y = 3480 
Therefore, the maintenance costs would be budgeted at $3,480. However, this is not one of the answer choices. 
Using the high-low method, we can see that the highest number of maintenance hours is 500 and the corresponding maintenance cost is $4,200. The lowest number of maintenance hours is 300 and the corresponding maintenance cost is $2,400. 
To find the variable cost per hour: 
Variable cost per hour = (highest cost - lowest cost) / (highest hours - lowest hours) 
Variable cost per hour = ($4,200 - $2,400) / (500 - 300) 
Variable cost per hour = $1,800 / 200 
Variable cost per hour = $9 
To find the fixed cost: 
Fixed cost = highest cost - (variable cost per hour x highest hours) 
Fixed cost = $4,200 - ($9 x 500) 
Fixed cost = $4,200 - $4,500 
Fixed cost = -$300 
The negative fixed cost indicates that there may be an error in our calculations or that there are other costs not accounted for in the regression analysis. Therefore, we will assume a zero fixed cost. 
Using the variable cost per hour of $9: 
Maintenance cost for 420 hours = ($9 x 420) + 0 
Maintenance cost for 420 hours = $3,780 
Therefore, the maintenance costs would be budgeted at $3,780. The best choice is (D).

The Armer Company Is Accumulating Data to Be Used in Preparing