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Yellow Theory, Inc. operates a chain of fitness centres in the Montreal area. The firms VP of Finance is accumulating data to be used in

Yellow Theory, Inc. operates a chain of fitness centres in the Montreal area. The firms 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 firms 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.

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