Question

Nation’s Capital Fitness, Inc. operates a chain of fitness centers in the Washington, D.C., area. The firm’s controller is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the firm’s equipment maintenance costs must be determined. The accounting staff has suggested the use of an equation, in the form of Y = a + bX, for maintenance costs. Data regarding the maintenance hours and costs for last year are as follows:
Month Hours of Maintenance
Service Maintenance
Costs
January 520 $ 4,470
February 490 4,260
March 300 2,820
April 500 4,350
May 310 2,960
June 480 4,200
July 320 3,000
August 400 3,600
September 470 4,050
October 350 3,300
November 340 3,160
December 320 3,030
Total 4,800 $ 43,200
Average 400 $ 3,600
Required:
1-a. Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Nation’s Capital Fitness, Inc.
Variable cost per hour $
Fixed cost per month $
1-b. Express the cost behavior pattern in equation form.
Maintenance cost = $ + $
2. What is the variable component of the maintenance cost?
Maintenance cost $ per hour
3. Compute the predicted maintenance cost at 590 hours of activity.
Maintenance cost $
4-a. Compute the variable cost per hour and the fixed cost per hour at 600 hours of activity.
Variable cost per hour $
Fixed cost per hour $

Answer 1

Answer:

Instructions are below

Explanation:

Giving the following information:

January 520 $ 4,470

February 490 4,260

March 300 2,820

April 500 4,350

May 310 2,960

June 480 4,200

July 320 3,000

August 400 3,600

September 470 4,050

October 350 3,300

November 340 3,160

December 320 3,030

A) To calculate the fixed and variable costs, we need to use the following formulas:

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

Variable cost per unit= (4,470 - 2,820) / (520 - 300)

Variable cost per unit= $7.5

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

Fixed costs= 4,470 - (7.5*520)

Fixed costs= $570

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

Fixed costs= 2,820 - (7.5*300)

Fixed costs= $570

B)

Total cost= 570 + 7.5x

x= hours of mantainance

C) x= 590

Total cost= 570 + 7.5*590

TC= $4,995

D) x= 600

Total cost= 570 + 7.5*600

TC= $5,070