Question

This scatter diagram reflects past maintenance hours and their corresponding maintenance costs.

1. Draw an estimated line of cost behavior.

2. Estimate the fixed and variable components of maintenance costs.

Short answer

1. The fixed component of maintenance cost is $ 3,000
2. Maintenance per hour is $1.43

Step-by-step solution

Meaning of Scatter diagram

The Scatter Diagram is the most straightforward way to look at the relationship between two factors. It includes plotting the values for each pair of factors as dots on a graph, yielding as many points as there are observations.

(1) Drawing estimated line of cost behavior.

(2) Estimating fixed cost and variable cost

Different production level taken equals 0 units and 3,500 units, and itstotal cost equals $3,000 and $8,000, respectively.

The fixed component of maintenance cost is $3,000

The variable cost is $8,000

Calculating maintenance per hour

$\begin{array}{rcl}\mathbf{Maintenance}\mathbf{per}\mathbf{hour}& \mathbf{=}& \frac{\mathbf{Change}\mathbf{}\mathbf{in}\mathbf{}\mathbf{cost}}{\mathbf{Change}\mathbf{}\mathbf{in}\mathbf{}\mathbf{units}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}}{\mathbf{3}\mathbf{,}\mathbf{500}-\mathbf{0}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{4285}\end{array}$

Thus, total cost for different production level equals $1.4285 per unit plus fixed cost.