Rio Bus Tours has incurred the following bus maintenance costs during the recent tourist season. (The real is Brazil’s national monetary unit. On the day this exercise was written, the real was equivalent in value to .269 U. S. dollar.) Month Miles Traveled by Tour Buses Cost November 14,850 18,500 real December 17,300 18,800 January 19,750 18,950 February 23,900 19,400 March 31,400 20,150 April 13,400 17,900 Required: 1. Use the high-low method to estimate the variable cost per tour mile traveled and the fixed cost per month. 2. Develop a formula to express the cost behavior exhibited by the company’s maintenance cost. 3. Predict the level of maintenance cost that would be incurred during a month when 43,000 tour miles are driven.

1. Variable cost = $0.125/mile and Fixed cost = $16,225

2. x = $16,225 + $0.125 × y

3. total maintenance cost = $21,600

Explanation:

Requirement 1

We know,

Variable cost using high-low method = (Total highest cost - Total lowest cost) ÷ (Highest activity - Lowest activity)

Given,

Highest activity = 31,400 miles (March)

Lowest activity = 13,400 miles (April)

Total highest cost = $20,150 (March)

Total lowest cost = $17,900 (April)

Therefore,

Variable cost using high-low method = ($20,150 - $17,900) ÷ (31,400 - 13,400) miles

Variable cost using high-low method = $2,250 ÷ 18,000 miles

Variable cost using high-low method = $0.125 per mile

Again,

we know, Total cost = Fixed cost + Variable cost

Using highest total cost and highest activities,

$20,150 = Fixed cost + $0.125 × 31,400 miles

or, $20,150 = Fixed cost + $3,925

or, Fixed cost = $20,150 - $3,925

Fixed cost = $16,225

Requirement 2 and 3

Requirement 2

The formula to express the cost behavior exhibited by the company's maintenance cost =

Let,

Total cost = x

Traveled by Tour Buses = y

As the fixed cost is fixed, the formula to express the answer =

x = $16,225 + $0.125 × y

It means, total cost = fixed cost + variable cost per miles driven.

Requirement 3

The level of maintenance cost that would be incurred during a month when 43,000 tour miles are driven =

total cost = fixed cost + variable cost per miles driven.

or, total cost = $16,225 + $0.125 × 43,000 miles

Total cost = $16,225 + $5,375

Therefore, total maintenance cost = $21,600

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