Chapter 5.A, Problem 8P

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

Nova Company's total overhead cost at various levels of activity is presented below:

Month				Machine	Total
				Hours	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:

Estimate how much of die $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.)

Using the high-low method, estimate a cost formula for maintenance in the form Y= a + bX.

Express the company's total overhead cost in the form Y= a + bX.

What total overhead cost would you expect to be incurred at an activity level of 75,000 machine-hours?