Problem 5A-8 High-Low Method; Predicting Cost [LO5-10]

Nova Companys total overhead cost at various levels of activity are presented below:

Month	Machine- Hours			Total Overhead Cost
April		51,000		$	181,360
May		41,000		$	157,760
June		61,000		$	204,960
July		71,000		$	228,560

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 41,000 machine-hour level of activity is:

Utilities (variable)	$	53,300
Supervisory salaries (fixed)		48,000
Maintenance (mixed)		56,460
Total overhead cost	$	157,760

Nova Companys management wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $228,560 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $228,560 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 46,000 machine-hours?