PROBLEM 3–15 High–Low Method; Predicting Cost [LO1, LO2]

Prince Company’s total overhead costs at various levels of activity are presented below:

 

    Month	Direct Labour- Hours	Total Overhead Cost
September . . . . . . . . . . . . . . . . .   .	100,000	$388,000
October . . . . . . . . . . . . . . . . . . . .   .	80,000	$340,400
November . . . . . . . . . . . . . . . . . .   .	135,000	$485,600
December . . . . . . . . . . . . . . . . . .   .	140,000	$483,200

 

Assume that the overhead cost above consists of utilities, supervisory salaries, depreciation, and maintenance. The breakdown of these costs at the 80,000-machine-hour level of activity in October is as follows:

 

Utilities (variable) . . . . . . . . . . . . . . . . . . . . . . . . . . .	$104,000
Supervisory  salaries	Â
and depreciation (fixed). . . . . . . . . . . . . . . . . .	120,000
Maintenance (mixed) . . . . . . . . . . . . . . . . . . . . . . .	  116,400
Total overhead cost . . . . . . . . . . . . . . . . . . . . . . . . .	$340,400

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

Required:

1.              Estimate how much of the $483,200 of overhead cost in December was maintenance cost. (Hint: To do this, first determine how much of the $483,200 consisted of utilities and su- pervisory salaries. Think about the behaviour of variable and fixed costs within the rele- vant 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 90,000 machine-hours?