Liberty Bell Fitness, Inc. operates a chain of fitness centers in Philadelphia.

Question

Liberty Bell Fitness, Inc. operates a chain of fitness centers in Philadelphia. 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 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:

Liberty Bell Fitness, Inc. operates a chain of fitness centers in Philadelphia. 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 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:

Explanation / Answer

Variable cost per hour :Highest hour = 570     5230

                                         lowest hour = 270       2800

Variable cost = (5230-2800)/ (570-270)

                           = 2430/ 300

                            = $ 8.1 per hour

At highest activity :Fixed cost = 5230 - (570 *8.1) = 5230 - 4617 = 613

Y = 613 + 8.1x

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