The following data pertains to activity and maintenance costs for two recent years:

Activity level in units Maintenance cost
Year 1 12,000 $15,000
Year 2 9,000 $12,600
Year 3 8,000 $12,000

Using the high-low method, the cost formula for maintenance would be:

Y= 6000 + 0.75X

Explanation:

High and low cost technique

Using the a high and low technique, total cost can be analysed and separated into fixed and variable portion. This analysis helps in the forecast of cost and therefore important for the preparation of budget.

Variable cost of maintenance

= (Cost at high activity - Cost at low activity)/ (high activity - low activity)

VC per act. = ( $15000 - $12000)/(12,000-8000)

                   = $0.75 per activity

Fixed cost of maintenance

= Total cost at high activity - (VC per act × high activity)

=  $15,000 - ( $0.75 ×  12,000)

=   $6,000

The cost formula will be:

Y= 6000 + 0.75X

Where Y = maintenance cost, X= level of activity

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