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 the high-low method to develop 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 540 $ 5,250 February 450 4,240 March 260 2,730 April 500 4,320 May 330 3,030 June 450 4,130 July 350 3,090 August 410 3,550 September 480 3,980 October 380 3,270 November 350 3,220 December 320 3,040 Total 4,820 $ 43,850 Average 402 * $ 3,654 * *Rounded rev: 05_30_2018_QC_CS-128090 -a. Compute the variable cost per hour and the fixed cost per hour at 640 hours of activity. (Round your answers to 2 decimal -b. Why is the fixed cost per hour possibly misleading? ------------Because it will not change as the number of hours changes. --------Because it will change as the number of hours changes. 2. Compute the predicted maintenance cost at 630 hours of activity.-------------- 3. Using your answer to requirement (1), what is the variable component of the maintenance cost? (Round your answer to two decimal places.) 4. Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Nation’s Capital Fitness, Inc. Express the cost behavior pattern in equation form. (Round coefficient of X to 2 decimal places and other answer to the nearest whole dollar amount.)
1. Variable Cost p u = Change in Cost / Change in Hours = Cost Hours 1st 5250 540 Low Level ( 4240) ( 450) Change in $ 1010 90 Unit Variable Cost = 930 / 40 =11. 22 per hour Total Variable Cost= 540 * 11. 22 = 6059 Total Fixed Cost = Total Cost - Total Variable Cost = 5250 - 6059 = 0 Variable Cost is More than Total Cost 640 Hours Maintenance Cost = Variable Cost is not identify Fixed Cost is not identify Change in Maintenance Cost but same in Hours in the Month of Feb & June Feb's Maintenance Cost 4240 Jun's Maintenance Cost 4130 But Same 450 Hours So Fixed cost treat as misleading Because it will not change as the number of hours changes. 2- predicted maintenance cost at 630 hours of activity (High Low Method) 640 Hours Maintenance Cost = Variable Cost = 630 x 9 = 5670 Fixed Cost 390 6,060 3- Variable Component: Y = a+Bx A = Fixed Cost B Variable cost per Hour X Hours Variable Component is B 4- High Low Method = Cost Hours High Level 5250 540 Low Level ( 2730) ( 260) Change in $ 2520 280 Unit Variable Cost = 2520/ 280 =9. 00 per hour Total Variable Cost= 540 * 9 = 4,860 Total Fixed Cost = Total Cost - Total Variable Cost = 5250 - 4860 = 390
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