Problem 5-23 High-Low Method; Predicting Cost [LO1, LO3]

Echeverria SA is an Argentinian 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 (in Argentinian pesos) at high and low levels of activity over recent years are given below:

Level of Activity

Low
High

Machine-hours
51,300

68,400

222,690
pesos
244,920
pesos

--------------------------------------------------------------------------------

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 51,300 machine-hours level of activity as follows:

Indirect materials (variable)
56,430
pesos

Rent (fixed)
129,000

Maintenance (mixed)
37,260

222,690
pesos

--------------------------------------------------------------------------------

For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Requirement1:

Estimate how much of the factory overhead cost of 244,920 pesos at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the 244,920 pesos cost consists of indirect materials and rent. Think about the behavior of variable and fixed costs.) (Omit the "pesos" sign in your response.)

Maintenance cost

pesos

Requirement2:

Using the high-low method, estimate a cost formula for maintenance where X represents the per machine-hour. (Omit the "pesos" sign in your response. Round the variable portion of the formula to 2 decimal places.)

Y
=

pesos
+

peso
X

Requirement3:

What total overhead costs would you expect the company to incur at an operating level of 56,430 machine-hours? (Omit the "pesos" sign in your response.)