Chapter 2, Problem 20P

PROBLEM 2-20 High-Low Method; Predicting Cost [L02-4, L02-5]
Nova Company’s total overhead cost at various levels of activity are presented below:

Month	MachineHours	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 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.
3. Express the company’s total overhead cost in the linear equation form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 75,000 machine-hours?