Question
Nova Companys total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 46,000 $ 199,200 May 36,000
Nova Companys total overhead cost at various levels of activity are presented below:
Month | Machine- Hours | Total Overhead Cost | |||
April | 46,000 | $ | 199,200 | ||
May | 36,000 | $ | 173,200 | ||
June | 56,000 | $ | 225,200 | ||
July | 66,000 | $ | 251,200 | ||
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:
Utilities (variable) | $ | 54,000 |
Supervisory salaries (fixed) | 60,000 | |
Maintenance (mixed) | 59,200 | |
Total overhead cost | $ | 173,200 |
Nova Companys management wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the $251,200 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $251,200 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 41,000 machine-hours?
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