Question
Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases
Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below: |
| Level of Activity | ||||
| Low | High | |||
Direct labor-hours |
| 58,500 |
| 78,000 | |
Total factory overhead costs | $ | 291,850 | $ | 332,800 | |
The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 58,500-hour level of activity as follows: |
| ||
Indirect materials (variable) | $ | 105,300 |
Rent (fixed) |
| 134,000 |
Maintenance (mixed) |
| 52,550 |
| ||
Total factory overhead costs | $ | 291,850 |
| ||
To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements. |
Required: |
1. | Estimate how much of the $332,800 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $332,800 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)
Maintenance Cost at high level of activity: $____________________
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2. Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations.)
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3. What total factory overhead costs would you expect the company to incur at an operating level of 64,350 direct labor-hours? (Do not round intermediate calculations.)
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