Question
Nova Companys total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 47,000 $ 191,100 May 37,000
Nova Companys total overhead cost at various levels of activity are presented below:
Month | Machine- Hours | Total Overhead Cost | |||
April | 47,000 | $ | 191,100 | ||
May | 37,000 | $ | 165,100 | ||
June | 57,000 | $ | 217,100 | ||
July | 67,000 | $ | 243,100 | ||
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 37,000 machine-hour level of activity is:
Utilities (variable) | $ | 51,800 |
Supervisory salaries (fixed) | 49,000 | |
Maintenance (mixed) | 64,300 | |
Total overhead cost | $ | 165,100 |
Nova Companys management wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the $243,100 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $243,100 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.)
2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX.
3. Express the companys total overhead cost in the form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 42,000 machine-hours?
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