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An analysis of past maintenance costs indicates that maintenance cost is an average of $0

Accounting

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?

$400

$2,000

$1,500

$2,250

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Total cost @ activity level 10,000 = $0.20 x 10,000

= $2,000

 

Total cost @ activity level 8,000 = $0.25 x 8,000

= $2,000

 

Variable rate ($/ machine hour)= Difference in total cost / Difference in activity level

= ($2,000 - $2.000) / (10,000 - 8,000)

= 0

 

Total expected maintenance cost at activity level 8,700 = $2,000

 

Note: Total cost= Fixed cost