Question

The controller of Gutierrez Industries has collected the following monthly expense data for use in analyzing the cost behaviour of maintenance costs:

Month		Total Maintenance Costs			Total Machine Hours
January		$2,750			3,500
February		3,000			4,000
March		3,600			6,000
April		4,500			7,900
May		3,200			5,000
June		5,000			8,000

(a) Determine the fixed and variable cost components using the high- low method.

(b) Prepare a graph showing the behaviour of maintenance costs, and identify the fixed and variable cost elements. Use 2,000-hour increments and $1,000 cost increments.

Answer 1

Answer to Question a:

Variable cost determined using high low method: Variable cost per machine hour = (Highest maintenance cost - lowest maintenance cost)/(Highest machine hours - lowest machine hours) Variable cost per machine hour = ($5,000 - $2,750)/(8,000 - 3,500) Variable cost per machine hour = $0.5 per machine hour Fixed Cost: Fixed Cost = Highest Maintenance Cost - (Variable Cost X Highest Machine Hours) Fixed Cost $5,000 - (0.5 X 8,000) Fixed Cost = $5,000 - $4,000 Fixed Cost = $1,000

Workings for Question b:

Variable Cost = Machine Hours X $0.5

Total Cost = Variable cost + Fixed cost

Variable Cost Fixed Cost Total Cost Hours 1,000 1,000 2,000 1,000 1,000 2,000 4,000 2,000 1,000 3,000 6,000 3,000 1,000 4,000 8,000 4,000 1,000 5,000 10,000 5,000 1,000 6,000

Graph:

Graph Showing Behavior Of Maintenance Cost 8,000 6,000 4,000 2,000 2,000 1,000 3,000 4,000 5,000 6,000 Maintenance Cost Variable Cost Fixed Cost Total Cost Machine Hours