Question

Required information The following information applies to the questions displayed below.] Nation's Capital Fitness, Inc. operates a chain of fitness centers in the Washington, D.C, area. The fim's controller is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattem of the firm's equipment maintenance costs must be determined. The accounting staff has suggested the use of the high-low method develop an equation, in the form of Y - a + bX, for maintenance costs. Data regarding the maintenance hours and costs for last year are as follows: Hours of Maintenance Maintenance Month JanuarY February March April Nay June July August September October November December Service 530 470 260 480 350 430 330 440 490 370 370 340 4,860 Costs $ 5,045 4,250 2,750 4,320 3,020 4,160 3,080 3,590 3,970 3,280 3,200 3,080 $43,745 Total Average 405 3,645 Rounded 3. Compute the predicted maintenancę cost at 600 hours of activity. <Prex8 9 of 14 Next>

Answer 1

High-low method is the mathematical technique used to split mixed cost into Variable cost and Fixed Cost. Under the High-Low method, calculating expected total cost at an activity is a 4 step process. Step 1 - Identifying the highest, lowest activities and costs at the respective activities. x,-Lowest activity in the given data 260 hours (January) X2-Highest activity in the given data 530 hours (March) Yi -Cost at lowest activity (260 hours) in the given data $2,750 Y2-Cost at highest activity (530 hours) in the given data -S5,045 Step2 - Calculation of Variable Cost per hour (b) using the following formula: Y2-Y1 Variable cost per unit-x2-x1 s2.295- S8.50 perh 270 hours Y2-Y 1$5,045 -$2,750 $8.50 per hour >b X2-X1 530 hours - 260 hours Step3- Calculation of fixed cost (a) using the following formula: Fixed cost-Yi - bXi (or) Y2- bXz (b Variable cost per unit) Fixed cost (a)-Yi-bXi $2,750-(S8.50 x 260 hours) $2,750-$2,210 S540>a

Step 4- Calculation of predicted maintenance cost at 600 hours of activity X-Activity 600 hours Predicted maintenance cost = Y = Fixed Cost + (Variable Cost per hour x Activity) a+bX = $540 + ($8.50 per hour x $600 hours) $540 + $5,100 $5,640 predicted maintenance cost-$5,640