Question

High-Low Method, Cost Formulas During the past year, the high and low use of three different resources for Fly High Airlines occurred in July and April. The resources are airplane depreciation, fuel, and airplane maintenance. The number of airplane flight hours is the driver. The total costs of the three resources and the related number of airplane flight hours are as follows:

Resource Airplane Flight Hours Total Cost

Airplane depreciation:

High 44,000 $ 18,100,000

Low 28,000 $ 18,100,000

Fuel:

High 44,000 445,896,000

Low 28,000 283,752,000

Airplane maintenance:

High 44,000 15,896,000

Low 28,000 12,080,000

Required: Use the high-low method to answer the following questions. If an answer is zero, enter "0". If required, round your answers to nearest dollar.

1. What is the variable rate for airplane depreciation? $ 10,134 per flight hour What is the fixed cost for airplane depreciation? $

2. What is the cost formula for airplane depreciation? Total cost of airplane depreciation = $

3. What is the variable rate for fuel? $ per flight hour What is the fixed cost for fuel? $

4. What is the cost formula for fuel? Total cost of fuel = $ x Number of airplane flight hours

5. What is the variable rate for airplane maintenance? $ per flight hour What is the fixed cost for airplane maintenance? $

6. What is the cost formula for airplane maintenance? Total cost of airplane maintenance = $ + ( $ × )

7. Using the three cost formulas that you developed, predict the cost of each resource in a month with 36,000 airplane flight hours. (Note: Do not round intermediate calculations.) Total cost of airplane depreciation $ Total cost of fuel $ Total cost of airplane maintenance $ Feedback

Answer 1

1.

Compute the variable rate of depreciation using the high-low method using the equation as shown below:

Variable-rate = ( High activity cost – Low Activity Cost ) / ( High activity units – Low activity units)

                     = $18,100,000 - $18,100,000) / 44,000 – 28,000

                     = $0

Hence, the variable rate per hour for the depreciation is $0.

Compute the fixed cost using the equation as shown below:

Fixed cost = Total high activity cost – ( Variable rate per hour * Highest Activity hours)

                = $18,100,000 – ($0 * 44,000)

               = $18,100,000.

Hence, the fixed cost is $18,100.

2.

Cost formula of depreciation is as follows:

Total cost = ( Variable rate per hour * Number of hours) + Fixed cost

3

Compute variable rate for fuel using the high-low method using the equation as shown below:

Variable-rate = ( High activity cost – Low Activity Cost ) / ( High activity units – Low activity units)

                     = $445,896,000 - $283,752,000) / 44,000 – 28,000

                     = $10,134

Hence, the variable rate per hour for the fuel is $10,134.

Compute the fixed cost using the equation as shown below:

Fixed cost = Total high activity cost – ( Variable rate per hour * Highest Activity hours)

                = $445,896,000 – ($10,134 * 44,000)

               = $445,896,000 - $445,896,000      

               = $0

Hence, the fixed cost is $0.

4.

Cost formula for fuel is as follows:

Total cost = ( Variable rate per hour * Number of hours) + Fixed cost