Sheffield Corp.'s high and low level of activity last year was 67000 units of product produced in May and 27000 units produced in November. Machine maintenance costs were $272600 in May and $120600 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.

Question

Jasmin Mann

Business

12 May, 10:58

Sheffield Corp.'s high and low level of activity last year was 67000 units of product produced in May and 27000 units produced in November. Machine maintenance costs were $272600 in May and $120600 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.

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The correct answer is $173,800.

Explanation:

According to the scenario, the computation of the given data are as follows:

We can calculate the total maintenance cost by using following formula:

Total maintenance cost = Fixed cost + (Units * Units variable cost)

Where, Units variable cost = ($272600 - $120600) : (67000 - 27000)

= 152,000 : 40,000 = $3.8

And Fixed cost = $272600 - (67000 * $3.8)

= $272,600 - $254,600 = $18,000

By putting the value in the formula, we get

Total maintenance cost = $18,000 + (41,000 * $3.8)

= $18,000 + $155,800

= $173,800