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The controller of Ivanhoe Industries has collected the following monthly expense data for use in analyzing...

The controller of Ivanhoe Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.

Month

Total
Maintenance Costs

Total
Machine Hours
January $2,630 340
February 2,930 390
March 3,530 540
April 4,430 650
May 3,130 540
June 5,230

740

1. Determine the variable cost components using the high-low method. (write out each step and why)

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Answer #1

Answer : Calculation of variable cost components using the high-low method.

Variable Cost Component

= (Highest Maintenance cost - Lowest Maintenance Cost) / Highest Machine Hours - Lowest Machine Hours

where,

Highest Maintenance cost is in month June = $5,230

Highest Machine Hours is in month June =   740 hours

Lowest Maintenance cost is in month Jan =   $2,630

Lowest Machine Hours is in month Jan = 340 hours

Variable Cost = ( $5,230 - $2,630 ) / ( 740 hours - 340 hours )

= $2,600 / 400 hours

= $6.5 per machine hour

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