An analysis of past maintenance costs indicates that maintenance cost is an aver
ID: 2376928 • Letter: A
Question
An analysis of past maintenance costs indicates that maintenance cost is an average of $0.20 per machine-hour at an activity level of 10,000 machine-hours and $0.25 per machine-hour at an activity level of 8,000 machine-hours. Assuming that this activity is within the relevant range, what is the total expected maintenance cost if the activity level is 8,700 machine-hours?Explanation / Answer
Let the cost be represented by the equation TC = FC + x*VC TC-total cost, FC-Fixed cost, VC-Variable cost, x-no of machine hours 0.2*10000 = FC + 10000*VC............(1) 0.25*8000 = FC + 8000*VC..............(2) (1) - 1.25*(2) 0.2*10000 = FC + 10000*VC -0.25*8000*1.25 = -1.25FC - 10000*VC -0.25 FC = -500 >>>>>>>>> FC =2000 Putting this value in (1) VC = 0 so there is no variable cost. Thus for 8700 machine hours the estimated maintenance cost will be 2000/8700 = $0.23