Question

Exercise 5-3 al-a2 (Video) (Part Level Submission) The controller of Crane Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs. Month January February March April Total Total Maintenance Costs Machine Hours $2,880 330 3,180 380 3,780 530 4,680 660 3,380 530 5,520 730 May June (al) Your answer is correct. Determine the variable cost components using the high-low method. (Round answer to 2 decimal places e.g. 2.25.) Variable cost per machine hour 6.60

Answer 1

Answer- a1)- Variable cost per machine hour = $6.60 per machine hour.

a2)- Total fixed costs = $702.

Explanation:- High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit = (Y2-Y1)/(X2-X1)

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = (y2 – b)*x2 = (y1 – b*x1)

We have,
at highest activity: x₂ = 730 machine hours; y₂ = $5520
at lowest activity: x₁ = 330 machine hours; y₁ = $2880

Variable Cost per machine hour = ($5520 - $2880) /(730 hours - 330 hours)  

= $2640/400 machine hour

= $6.60 per machine hour
Total Fixed Cost = $5520 − ($6.60 per machine hour*730 machine hours)

= $5520 -$4818

= $702