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.

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.

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

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

4. 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.

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