Question

Song, Inc., uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40. On the basis of this information, the fixed cost was:
a. $550,000.
b. $734,800.
c. $760,000.
d. $184,800.
e. $210,000.

Answer 1

Answer:

a. $550,000

Explanation:

The total maintenance cost at 22,000 machine hours is given as:

Total maintenance costs=22,000*33.40=$734,800

The total maintenance cost at 25,000 machine hours is given as:

Total maintenance costs=25,000*30.40=$760,000

Variable cost per unit=760,000-734,800/25,000-22,000

                                   =$8.4 per unit

Total costs=fixed costs+variable cost

734,800=fixed costs+8.4*22,000

Fixed cost=734,800-184,800=$550,000

So the answer is a. $550,000