Question - iberty Bell Fitness, Inc. operates a chain of fitness centers in Philadelphia. The firm's controller is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the firm's equipment maintenance costs must be determined. The accounting staff has suggested the use of an equation, in the form of Y 5 a 1 bX, for maintenance costs. Data regarding the maintenance hours and costs for last year are as follows:
Month Hours of Maintenance Service Maintenance Costs
January 525 $ 4,710
February 505 4,310
March 310 2,990
April 495 4,200
May 315 3,000
June 485 4,215
July 315 2,950
August 405 3,680
September 475 4,100
October 345 3,250
November 350 3,260
December 335 3,015
Total 4,860 $43,680
Average 405 $ 3,640
Required:
1. Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Liberty Bell Fitness, Inc. Express the cost behavior pattern in equation form.
2. Using your answer to requirement (1), what is the variable component of the maintenance cost?
3. Compute the predicted maintenance cost at 600 hours of activity.
4. Compute the variable cost per hour and the fixed cost per hour at 610 hours of activity. Explain why the fixed cost per hour could be misleading.