Question

Gribble Company’s high and low level of activity last year was 60,000 units of product produced in May and 20,000 units produced in November. Machine maintenance costs were $104,000 in May and $40,000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45,000 units.

a. $90,000

b. $96,000

c. $78,000

d. $80,000

how did we solve it and get D?

Answer 1

Calculation of Expected utilities cost for the month when production is expected to be 45,000 units:
High Activity	=	60,000 units	=	May
Low Activity	=	20,000units	=	November
Utilities cost of :
May			=	$1,04,000
November			=	$ 40,000
Variable cost per unit	=	($1,04,000 - $40,000) / (60,000 - 20,000)
	=	($64,000) / (40,000)
	=	$1.60 per unit produced
To calculate total fixed cost:
As per high activity	=	$1,04,000 - (60,000 X $1.60)	=	$ 8,000
As per low activity	=	$40,000 - (20,000X $1.60)	=	$ 8,000
Cost formula for utilities cost	=	$8,000 + $1.60X
Expected utilities cost for the month when production is expected to be 45,000 units	=	$8,000 + ($1.60 X 45,000)	=	$ 80,000