Problem: Nation’s Captial Fitness, Inc. operates a chain of fitness centers in the Washington, D.C., area. 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:
Month Hours of Maintenance Service Maintenance Costs
January 520 $4470
February 490 4.260
March 300 2.820
April 500 4.350
May 310 2.960
June 480 4.200
July 320 3.000
August 400 3.600
September 470 4.050
October 350 3.300
November 340 3.160
December 320 3.030
Total 4800 $43200
Average 400 $ 3600
Required to do:
Question 1. Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Nation’s Capital Fitness, Inc. Express the cost behavior pattern in equation form.
Question 2. Using your answer to requirement (1), what is the variable component of the maintenance cost?
Question 3. Compute the predicted maintenance cost at 590 hours of activity.
Question 4. Compute the variable cost per hour and the fixed cost per hour at 600 hours of activity. Explain why the fixed cost per hour could be misleading.