Question

Problem 6-38 Tapital Fitness, Inc. operates a chain of fitness centres in the Ottawa area. The firm's controller is ac- umulating data to be used in preparing its annual profit plan for the coming year. The cost behaviour attern of the firm's equipment maintenance costs must be determined. The accounting staff has sug- ested the use of an equation, in the form Ya + bx, for maintenance costs. Data regarding the saintenance hours and costs for last year are as follows: Hours of Maintenance Month Maintenance Service Costs January 525 $ 4.710 February 505 4.310 March 310 2.990 April 495 4200 May 315 3,000 June 485 4 215 July 315 2,950 August 405 3.680 September 475 4.100 October 345 November 350 3,260 December 335 3.015 4,860 $43,680 405 $ 3.640 quired Using the high-low method of cost estimation, estimate the behaviour of the maintenance costs in- curred by Capital Fitness, Inc. Express the cost behaviour pattern in equation form. Using your answer to requirement (1), what is the variable component of the maintenance cost Compute the predicted maintenance costat 600 hours of activity Compute the variable cost per hour and the fixed cost per hour at 610 hours of activity. Explain why the fired cost per hour could be misleading 3.250 o DELL

Answer 1

1) Change in hours= Highest hours-Lowest hours

= 525-310= 215

Change in maintenance costs= Highest cost-Lowest cost

= $4710-2990= $1720

Variable cost per unit= Change in maintenance costs/Change in hours

= $1720/215= $8 per hour

Fixed cost= Total cost-Variable cost

= $4710-(525*$8)= $510

Y= a+bX

Y= $510+$8X

2) Variable component of the maintenance cost= $8 per hour

3) Maintenance cost at 600 hours level of activity= Variable cost+Fixed cost

= ($8*600)+$510

= $5310

4) At 610 hours level of activity

Maintenance cost at 610 hours level of activity= Variable cost+Fixed cost

= ($8*610)+$510= $5390

Variable cost per hour= $8

Variable cost per hour remain same irrespective of the change in the number of hours.

Fixed cost per hour= $510/610= 0.84 per hour

Fixed cost per hour could be misleading because fixed costs changes with the change in hour while total fixed cost remains same irrespective of the change in the number of hours.

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