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