Question 4

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

Month Machine- Hours Total Overhead Cost April 70,000 $ 198,000 May 60,000 $ 174,000 June 80,000 $ 222,000 July 90,000 $ 246,000

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 60,000 machine-hour level of activity is:

Utilities (variable) $ 48,000 Supervisory salaries (fixed) 21,000 Maintenance (mixed) 105,000 Total overhead cost $ 174,000

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

Required:

1. Estimate how much of the $246,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $246,000 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 75,000 machine-hours?

4 Month April May June July Machine- Hours 70,000 60,000 80,000 90,000 Total Overhead Cost $ 198,000 $ 174,000 $ 222,000 $ 246,000 2.5 points Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 60,000 machine-hour level of activity is: eBook Print Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 48,000 21,000 105,000 $174,000 References Nova Company's management wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the $246,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $246,000 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 company's 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 75,000 machine-hours