PROBLEM 2–21 High-Low Method; Predicting Cost [LO3, LO4]

Golden Company’s total overhead cost at various levels of activity are presented below:

 

 

Month	Machine-Hours	Total Overhead Cost
March . . . . . . . . . . . . . . . . . . . .  .	50,000	$194,000
April . . . . . . . . . . . . . . . . . . . .	40,000	$170,200
May . . . . . . . . . . . . . . . . . . . . .	60,000	$217,800
June . . . . . . . . . . . . . . . . . . . . . . . . .	70,000	$241,600

 

 

Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 40,000 machine-hour level of activity is as follows:

 

 

 

 

The company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1.       Estimate how much of the $241,600 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $241,600 consisted of utili- ties and supervisory salaries. Think about the behavior of variable and fixed costs within the relevant range.)

2.       Using the high-low method, estimate a cost formula for maintenance.

3.       Express the company’s total overhead cost in the form Y = a + bX.

4.       What total overhead cost would you expect to be incurred at an activity level of 45,000 machine-hours?