E2-23 Determine fixed and variable costs using the high-low method and prepare graph.
The controller of Gutierrez Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.
Total Maintenance Costs / Total Machine Hours
January $2,800 / 3,000
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
Determine the fixed and variable cost components using the high-low method. (Round fixed cost to 0 decimal places, i.e. 1,200 and variable cost to 2 decimal places, i.e. 0.50.)
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Answer:
High – low method breaks down cost by defining the relationship of cost between the highest and lowest activity.
variable cost = cost of highest activity less cost of lowest activity / highest activity less lowest activity
=$5000 – $2800 / 8000 – 3000
=$2200 / 5000
=$0.44
Fixed cost: $1180
Let us compute the distribution of January cost:
$2800 less 3000 * 0.44 = $1480 = fixed cost
Another try: June cost
$5000 less 8000 * 0.44 = $1480 = fixed cost
So, variable cost is equal to 0.44 per activity while fixed cost is $1480 within the relevant range.
Source(s): My brain only.
Estimate the total cost if the company produces 700 hours.