Question

Problem 3-17 High-Low Method; Predicting Cost [LO1, LO2] 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 Machine-hours Total factory overhead costs Low 62,200 $36,159, 600 High 82,200 $40,519, 600 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 62,200 machine-hours level of activity as follows: Indirect materials (variable) Rent (fixed) Maintenance (mixed) $9,019,000 18,100,000 9,040, 600 Total factory overhead costs $36,159,600 For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Answer 1

Answer:

1)

Maintenance cost at high level activity - $40,519,600- ($9,019,000*82200/62200) - $18,100,000= $10,500,600

2)

Variable cost of maintenance per machine hour = (cost at high level - Cost at low level) / (High level activity - Low level activity)

= ($10,500,600 - $9,040,600) / (82200 - 62200) = $73 per machine hour

Fixed cost of maintenance = $10,500,6000 - (82200*$73) = $4,500,000

Cost formula : Y = $4,500,000 + $73 X

3)

Expected overhead cost at 67200 hours = ($9,019,000*67200 / 62200) + $18,100,000 + ($4,500,000 + $73*67200)

= $9,744,000 + $18,100,000 + $9,405,600 = $37,249,600