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Winston Company’s-(“High-Low Method”)

Winston Company’s high and low level of activity last year was 60,000 units produced in April and 20,000 units produced in December. Machine maintenance costs were $52,000 in April and $20,000 in December. Using the high-low method, estimated total maintenance cost for a month in which 40,000 units will be produced is

a) $34,667

b) $36,000.

c)not determinable with the information given.

d) $40,000.

Answer:

b) $36000

Explanation

Variable cost per unit = change in total costs/ high minus low activity level

 = ($52,000-$20,000)/ (60,000-20,000) = $0.80

Fixed cost element = total cost at high level -variable cost at high level

= $52,000 – ($.80×60,000 units)

=$52,000 – 48,000 =   $4,000

Maintenance costs are therefore, $4,000 fixed cost per month + $.80 variable cost per unit, and at 40,000 units, the

Total maintenance costs = $4,000 + ($.80×40,000 units) =$36,000

(“High-Low Method”)

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