2.1(8 marks) Cost Behaviour - Chapter 3

Yellow Theory, Inc. operates a chain of fitness centres in the Montreal area. The firm's VP of Finance 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 the high-low method to predict equipment maintenance costs. Data for the most recent 12 months of activity is outlined in Table A.

Table A

Month	Hours of Maintenance Service	Maintenance Costs
January	520	$4,470
February	490	4,260
March	300	2,820
April	500	4,250
May	310	2,960
June	480	4,200
July	320	3,000
August	400	3,600
September	470	4,050
October	350	3,300
November	340	3,160
December	320	3,030
Total	4,800	$43,100

Required:

1. Using the high-low method of cost estimation, estimate the behavior of the maintenance costs incurred by Yellow Theory Fitness. Express the cost behavior pattern in equation form.

1. Using your answer to requirement a), what is the variable component of the maintenance cost?

1. Compute the predicted maintenance cost at 590 hours of activity.

1. Compute the variable cost per hour and the fixed cost per hour at 600 hours of activity. Explain why the fixed cost per hour could be misleading.