PROBLEM 2-20 High-Low Method; Predicting Cost [LO2-4, LO2-5] Nova Company's total overhead cost at various levels of activity are presented below: Machine Hours Total Overhead Cost Month April May ........ June ....... 70,000 60,000 80,000 90,000 $198,000 $174,000 $222,000 $246,000 July .... Assume that the total overhead cost above consists of utilities, supervisory salaries, and mainte- nance. 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!) 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?
Related questions
| Nova Companyâs total overheadcost at various levels of activity are presented below: |
| Month | Machine-Hours | Total OverheadCost |
| April | 48,000 | $200,760 |
| May | 38,000 | $176,560 |
| June | 58,000 | $224,960 |
| July | 68,000 | $249,160 |
Assume that the total overhead cost above consists of utilities,supervisory salaries, and maintenance. The breakdown of these costsat the 38,000 machine-hour level of activity is: |
| Utilities(variable) | $ | 45,600 |
| Supervisory salaries(fixed) | 68,000 | |
| Maintenance(mixed) | 62,960 | |
| Total overheadcost | $ | 176,560 |
Nova Companyâs management wants to break down the maintenancecost into its variable and fixed cost elements. |
| Required: |
| 1. | Estimate how much of the $249,160 of overhead cost in July wasmaintenance cost. (Hint: To do this, it may be helpful tofirst determine how much of the $249,160 consisted of utilities andsupervisory salaries. Think about the behavior of variable andfixed costs!) (Do not round intermediatecalculations.) |
| 2. | Using the high-low method, estimate a cost formula formaintenance. (Do not round your intermediate calculations.Round the "Variable cost per unit" to 2 decimalplaces.) |
| 3. | Express the companyâs total overhead cost in the linearequation form Y = a + bX. (Do not round yourintermediate calculations. Round the "Variable cost per unit" to 2decimal places.) |
| 4. | What total overhead cost would you expect to beincurred at an activity level of 43,000 machine-hours? (Donot round intermediate calculations.) |
