Question

The controller of Hall Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.

Month		Total Maintenance Costs			Total Machine Hours
January		$3,105			4,116
February		3,528			4,704
March		4,234			7,056
April		5,292			9,290
May		3,763			5,880
June		5,433			9,408

Determine the fixed cost components using the high-low method. (Round answer to 0 decimal places e.g. 2,520.)

Fixed costs

$

Answer 1

Ans.	High low method: This method is based on the highest level of cost and activity & the lowest level of cost and activity.
	We assumed that the highest units lead to highest cost and lowest units lead to lowest cost.
	For the calculation of fixed cost component of total cost, we need to find out the variable cost per unit
	firstly.
	Variable cost per unit = (Highest cost - Lowest cost) / (Highest machine hours - Lowest machine hours)
		($5,433 - $3,105) / (9,408 - 4,116)
		$2,328 / 5,292
		$0.4499 per unit
	Fixed cost =   Total cost - (Variable cost per unit * Activity level)
	Fixed cost can be calculated on the base of highest and lowest units.
	Highest units	Lowest units
	$5,433 - ($0.4499 * 9,408)	$3,105 - ($0.4499 * 4,116)
	$5,433 - $4,139	$3,105 - $1,811
	$1,294	$1,294
	So the fixed cost is   =   $1,294.