An analysis of past maintenance costs indicated that maintenance costs is an ave

Question

An analysis of past maintenance costs indicated that maintenance costs 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 of the activity level is at 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

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