Oak Island Amusements Center provides the following data on the costs of mainten
ID: 2545811 • Letter: O
Question
Oak Island Amusements Center provides the following data on the costs of maintenance and the number of visitors for the last three years Maintenance Costs ($000) $ 2,316 Number of Visitors per Year: (thousands) 1,830 2,010 2,700 2,559 3,360 Required a. Use the high-low method to estimate the fixed cost of maintenance annually and the variable cost of maintenance per visitor. (Enter your answers in dollars not in thousands of dollars. Round "Variable cost" answer to 2 decimal places.) Variable cost per visitor 1.20 Annual fixed cost 1,200 b. The company expects a record 2,000,000 visitors next year. What would be the estimated maintenance costs? (Enter your answer in dollars not in thousands of dollars.) Estimated maintenance costs 3,600Explanation / Answer
Answer:- a)-Variable Cost per visitor=$1.20 per visit
Annual Fixed costs (in $000) =$120
Explanation:-
High-Low Method:-
Variable cost per unit (x) is calculated using the following formula:
Variable cost per unit=a2-a1/b2-b1
Where,
a2 is the total cost at highest level of activity;
a1 is the total cost at lowest level of activity;
b2 are the number of units at highest level of activity; and
b1 are the number of units at lowest level of activity
Total Fixed Cost
Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:
Total Fixed Cost = a2 – x*b2 = a1 – x*b1
We have,
at highest activity: b2 = 2700; a2 = $3360
at lowest activity: b1 = 1830; a1 =$2316
Variable Cost per visitors = ($3360 $2316) ÷ (2700 visitors – 1830 visitors)
= $1044/870 visitors =$1.20 per visit
Total Fixed Cost (in $000) = $3360 ($1.20 *2700) = $3360 – $3240 =$120
b)-Estimated maintenance cost (in $000) = Variable + Fixed
=($1.20 per visit*2000)+120 =$2400+$120 =$2520
Variable cost per unit=a2-a1/b2-b1
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