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The following data relate to the Torrence Company for May and August:

May August
Maintenance hours 25,000 29,000
Maintenance cost $1,175,000 $1,247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?

a. Total maintenance costs will be $1,182,000.
b. Total maintenance costs will be $1,193,000.
c. Total maintenance costs will be $1,247,000.
d. Total maintenance costs will be $1,221,000.
e. Total maintenance costs will be $1,175,000.

Sagot :

facundobuzzetti

Answer:

Total cost= $1,193,000

Explanation:

Giving the following information:

May August

Maintenance hours 25,000 29,000

Maintenance cost $1,175,000 $1,247,000

First, we need to calculate the variable and fixed costs using the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (1,247,000 - 1,175,000) / (29,000 - 25,000)

Variable cost per unit= $18

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 1,247,000 - (18*29,000)

Fixed costs= $725,000

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 1,175,000 - (18*25,000)

Fixed costs= $725,000

Now, the total cost for 26,000 hours:

Total cost= 725,000 + 18*26,000

Total cost= $1,193,000

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