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) What would be the cost equation if the high-low method is used?
A)Maintenance Costs = 9.00 × Hours of Activity.
B)Maintenance Costs = 3,600 + 400 × Hours of Activity.
C)Maintenance Costs = 570 + 7.50 × Hours of Activity.
D)Maintenance Costs = 34.469 + .99724 × Hours of Activity.

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)  What would be the cost equation if the high-low method is used?
A)Maintenance Costs = 9.00 × Hours of Activity. 
B)Maintenance Costs = 3,600 + 400 × Hours of Activity. 
C)Maintenance Costs = 570 + 7.50 × Hours of Activity. 
D)Maintenance Costs = 34.469 + .99724 × Hours of Activity.

Quizplus · Accepted Answer

The high-low method involves using the highest and lowest data points to calculate the variable cost per unit of activity. From the data provided, we can see that the highest level of activity (in terms of maintenance hours) was 800, with corresponding costs of $6,150. The lowest level of activity was 200 hours, with costs of $2,100.

Using this information, we can calculate the variable cost per unit of activity as follows:

Variable cost per unit of activity = (High cost - Low cost) / (High activity - Low activity)
Variable cost per unit of activity = ($6,150 - $2,100) / (800 - 200)
Variable cost per unit of activity = $4,050 / 600
Variable cost per unit of activity = $6.75 per maintenance hour

Next, we can use this information to calculate the fixed cost component of the cost equation. We can do this by plugging in one set of activity and cost data (let's use the high point) and solving for the fixed cost:

$6,150 = ($6.75 x 800) + Fixed cost
$6,150 = $5,400 + Fixed cost
Fixed cost = $750

Thus, the cost equation using the high-low method is:

Maintenance Costs = $750 + ($6.75 x Hours of Activity)

This matches answer choice C.

The Armer Company Is Accumulating Data to Be Used in Preparing