Question
Colby Limited is a manufacturing company whose total factory overhead costs fluctuate somewhat from year to year, according to the number of machine-hours worked in
Colby Limited is a manufacturing company whose total factory overhead costs fluctuate somewhat from year to year, according to the number of machine-hours worked in its production facility. These costs at high and low levels of activity over recent years are given below:
Level of Activity | ||||||
Low | High | |||||
Machine-hours | 50,000 | 75,000 | ||||
Total factory overhead costs | $ | 14,250,000 | $ | 17,625,000 | ||
The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 50,000 machine-hours level of activity as follows:
Indirect materials (variable) | $ | 5,000,000 |
Rent (fixed) | 6,000,000 | |
Maintenance (mixed) | 3,250,000 | |
Total factory overhead costs | $ | 14,250,000 |
For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the factory overhead cost of $17,625,000 at the high level of activity consists of maintenance cost. (Hint: First determine how much of the $17,625,000 cost consists of indirect materials and rent. Think about the behaviour of variable and fixed costs.) (Do not round intermediate calculations.)
2. Using the highlow method, estimate a cost formula for maintenance. (Round variable cost to 1 decimal place and fixed cost to the nearest dollar amount.)
3. What total overhead costs would you expect the company to incur at an operating level of 70,000 machine-hours? (Do not round intermediate calculations.)
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