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 | 69,900 | 93,200 | |||
Total factory overhead costs | $ | 295,100 | $ | 341,700 | |
The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 69,900-hour level of activity as follows: |
Indirect materials (variable) | $ | 104,850 |
Rent (fixed) | 125,000 | |
Maintenance (mixed) | 65,250 | |
Total factory overhead costs | $ | 295,100 |
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 $341,700 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 $341,700 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.) |
2. | Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations.) |
3. | What total factory overhead costs would you expect the company to incur at an operating level of 76,890 direct labor-hours? (Do not round intermediate calculations.) |
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