Question

Bramble Corp.’s high and low level of activity last year was 70000 units of product produced in May and 21000 units produced in November. Machine maintenance costs were $222000 in May and $75000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 41000 units.

Answer 1

Step-1, Variable cost per unit

Variable cost per unit = Change in machine maintenance cost / Change in number of units

Change in Machine Maintenance costs

High = $222,000

Low = $75,000

Change = $147,000

Change in Number of units

High = 70,000 Units

Low = 21,000 Units

Change = 49,000 Units

Therefore, Variable cost per unit = Change in machine maintenance cost / Change in number of units

= $147,000 / 49,000 Units

= $3.00 per unit

Stpe-2, Fixed Cost Component

Fixed cost component = Total Machine Maintenance cost - Variable costs

= $222,000 – [70,000 Units x $3.00]

= $222,000 – 210,000

= $12,000

Step-3, Estimated total maintenance cost

Estimated total maintenance cost = Fixed Cost + Variable Cost

= $12,000 + [41,000 Units x $3.00]

= $12,000 + 123,000

= $135,000

“Hence, The estimated total maintenance cost for a month for 41000 units = $135,000”