High-Low Method; Predicting Cost
Nova Company's total overhead cost at various levels of activity are presented below:
Month Machine-Hours Total 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 salies (fixed) 21,000
Maintenance (mixed) 105,000
Total Overhead Cost $174,000
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!)
2.
Using the high-low method, estimate a cost formula for maintenance.
3.
Express the company's total overhead cost in the linear equation form why = a bX.
4.
What total overhead cost would you expect to be incurred at an operating activity level of 75,000 machine-hours?
