Wheatown Implement Company produces farm implements for various large vehicles used for farming. Wheatown is in the process of measuring its manufacturing costs and is particularly interested in the costs of the manufacturing maintenance activity since maintenance is a significant mixed cost. Activity analysis indicates that maintenance activity consists primarily of maintenance labour setting up machines using certain supplies. A setup consists of preparing the necessary machines for a particular production run of a product. During setup, machines must still be running, which consumes energy. Thus, the costs associated with maintenance include labour, supplies, and energy. Unfortunately, Wheatown’s cost accounting system does not trace these costs to maintenance activity separately. Wheatown employs two full-time maintenance mechanics. The annual salary of a maintenance mechanic is $25,000 and is considered a fixed cost. Two plausible cost drivers have been suggested: units produced and number of setups.

Data had been collected for 12 months and a plot made for the cost driver—units of production. The maintenance cost figures collected include estimates for labour, supplies, and energy. Sue Hatcher, controller at Wheatown, recently attended an activity-based costing seminar where she learned that some types of activities are performed each time a batch of goods is produced rather than each time a unit is produced. Based on this concept, she has gathered data on the number of setups performed over the past 12 months. The plot of monthly maintenance costs versus the two potential cost drivers is shown above.
1. Find the monthly fixed maintenance cost and the variable maintenance cost per driver unit using the visual fit method based on each potential cost driver. Explain how you treated the April data.
2. Find the monthly fixed maintenance cost and the variable maintenance cost per driver unit using the high-low method based on each potential cost driver.
3. Which cost driver best meets the criteria for choosing cost functions?
Explain.

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Maintenance Costs (thousands) Maintenance Costs (thousands) 30 25 20 30 25 20 15 10 5 Maintenance Department Costs Cost Drivers: Production Units & Setups 0 0 1 Plant closed three weeks in April due to storm damage 2 Units Produced (thousands) 15 10 5 Plant closed three weeks in April due to storm damage 0 0 5 10 15 Number of Setups 3 20 25 30