The Armer Company is accumulating data to be used in preparing its annual profit

Question

The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows:

What would be the cost equation if the high-low method is used?

A. Maintenance costs = 3,579 + 403 x Hours of activity

B. Maintenance costs = 1,370 + 6.23 x Hours of activity

C. Maintenance costs = 215.323 + 0.91026 x Hours of activity

D. Maintenance costs = 8.10 x Hours of activity

The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows:

Explanation / Answer

B. Maintenance costs = 1,370 + 6.23 x Hours of activity Cost at highest level of activity              4,610.00 Cost at Lowest level of activity              2,990.00 Highest level of activity                  520.00 Lowest Level of activity                  260.00 Variable cost per unit = (4,610- 2,990)/(520 - 260) Variable cost per unit = 1,620 /260 Variable cost per unit = 6.23 Fixed Costs = 2990 - 6.23*260 Fixed Costs = 2990 - 1,620 Fixed Costs = $1,370 Equation is 1,370 + 6.23x

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