ExpertHard1 markMultiple Choice
CPA · Question 10 · Area I: Business Analysis
Using the High-Low method, determine the cost formula for maintenance costs based on the following data:<br/>- High Activity: 10,000 machine hours, $55,000 total cost<br/>- Low Activity: 6,000 machine hours, $39,000 total cost<br/><br/>What is the estimated total cost at 8,000 machine hours?
Using the High-Low method, determine the cost formula for maintenance costs based on the following data:<br/>- High Activity: 10,000 machine hours, $55,000 total cost<br/>- Low Activity: 6,000 machine hours, $39,000 total cost<br/><br/>What is the estimated total cost at 8,000 machine hours?
Answer options:
A.
$47,000
B.
$44,000
C.
$48,000
D.
$32,000
How to approach this question
1. Calculate Variable Rate = (Cost at High - Cost at Low) / (Activity at High - Activity at Low). 2. Calculate Fixed Cost = Total Cost - (Rate * Activity). 3. Apply formula to new activity level.
Full Answer
A.$47,000✓ Correct
A
Variable Rate = ($55,000 - $39,000) / (10,000 - 6,000) = $4 per hour.<br/>Fixed Cost = $55,000 - ($4 * 10,000) = $15,000.<br/>Total Cost at 8,000 hours = $15,000 + ($4 * 8,000) = $47,000.
Common mistakes
Selecting high/low based on cost instead of activity; forgetting to add the fixed cost component in the final step.
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