Oak Island Amusements Center provides the following data on the costs of maintenance and the number of visitors for the last three years. Number of Visitors per Year(thousands) Maintenance Costs ($000) 1,875 $ 4,110 2,055 4,515 3,385 7,281 Required: a. Use the high-low method to estimate the fixed cost of maintenance annually and the variable cost of maintenance per visitor. b. The company expects a record 2,900,000 visitors next year. What would be the estimated maintenance costs

Part a

Variable Cost = $1.50 per visitor

Fixed Cost = $187,500

Part b

$4,087,500

Explanation:

Step 1 : Identify the High and Low Point

High : 2,375,000 visitors at $3,750,000

Low : 1,825,000 visitors at $2,925,000

Step 2 : Determine Variable Cost

Variable Cost = Diff in Overheads ÷ Diff in Visitors

                       = ($3,750,000 - $2,925,000) ÷ ( 2,375,000 - 1,825,000)

                       = $825,000 ÷ 550,000

                       = $1.50

Step 2 : Determine the Fixed Cost

Fixed Cost = Total Overheads - Variable Costs

Choosing the High point

                  = $3,750,000 - $1.50 x 2,375,000

                  = $187,500

Step 3 : Determine Maintenance Cost on 2,600,000 visitors

Cost formula : Maintenance Cost =  $187,500 + $1.50 per visitor

therefore,

for 2,600,000 visitors,

Maintenance Cost =  $187,500 + $1.50 x 2,600,000

                               = $4,087,500

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