Question

PROBLEM 3-17 High-Low Method; Predicting Cost [L01 Q. L02 01 Colby Limited is a manufacturing company whose total factory overhead costs fluctuate somewhat from year to year, according to the number of machine-hours worked in its production facility. These costs at high and low levels of activity over recent years are given below: Level of Activity Low High Machine-hours 50,000 75,000 Total factory overhead costs $14,250,000 $17,625,000 Page 89 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 50.000 machine-hours level of activity as follows: Indirect materials (variable) $ 5,000,000 Rent (fixed) 6,000,000 Maintenance (mixed) 3,250,000 Total factory overhead costs $14,250,000 For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the factory overhead cost of $17,625,000 at the high level of activity consists of maintenance cost. 2. Using the high-low method, estimate a cost formula for maintenance. 3. What total overhead costs would you expect the company to incur at an operating level of 70,000 machine-hours?

Answer 1

Total cost = $17,625,000
Total Cost	17,625,000
Less: Indirect Material	7,500,000
Less: Rent	6,000,000
Maintenance Cost	4,125,000
	Machine hours	Maintenance Cost
High level of activity	75000	4125000
Low level of activity	50000	3250000
Change	25000	875000
Variable cost element	35	per MH
Fixed cost element	1,500,000
Y = 1,500,000+35X
Total factory overhead cost = (6,000,000+1,500,000)+70,000*(35+100) = $16,950,000

B C D E 1 Total cost = $17,625,000 3 Total Cost 17625000 4 Less: Indirect Material =5000000*75000/50000 5 Less: Rent 6000000 6 Maintenance Cost =B3-B4-B5 7 Machine hours Maintenance Cost 9 High level of activity 75000 4125000 10 Low level of activity 50000 3250000 11 Change =B9-B10 =C9-C10 12 Variable cost element =C11/B11 per MH 13 Fixed cost element =C9-B9*B12 14 15 Y = 1,500,000+35X 16 Total factory overhead cost = (6,000,000+1,500,000)+70,000*(35+100) = $16,950,000