Question

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

Month	Machine Hours			Total Overhead Cost
September		112,800		$	781,512
October		89,200		$	662,568
November		157,200		$	1,005,288
December		165,000		$	1,044,600

Assume that the overhead cost above consists of utilities, supervisory salaries, depreciation, and maintenance. The breakdown of these costs at the 89,200-machine-hour level of activity in October is as follows:

Utilities (variable)	$	233,704
Supervisory salaries       and depreciation (fixed)		172,000
Maintenance (mixed)		256,864
Total overhead cost	$	662,568

  

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

Required:

1.	Estimate how much of the $1,044,600 of overhead cost in December was maintenance cost. (Hint: To do this, first determine how much of the $1,044,600 consisted of utilities and supervisory salaries. Think about the behaviour of variable and fixed costs within the relevant range.) (Do not round intermediate calculations.)

      

2.	Using the high–low method, estimate a cost formula for maintenance. (Round variable cost to 2 decimal places and fixed cost to the nearest dollar amount.)

      

3.	Express the company’s total overhead cost in the form Y = a + bX. (Round variable cost to 2 decimal places and fixed cost to the nearest dollar amount.)

      

4.	What total overhead cost would you expect to be incurred at an activity level of 99,200 machine-hours? (Do not round intermediate calculations.)

      

Answer 1

1. Estimate how much of the $1,044,600 of overhead cost in December was maintenance cost.

Utilities (variable) (2.62*165000)	432300
Supervisory salaries       and depreciation (fixed)	172000
Maintenance (mixed)	440300
Total overhead cost	1044600

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

Variable cost per machine hour = Change in cost/change in machine hour

= 440300-256864/165000-89200

Variable cost per machine hour = 2.42 per machine hour

Fixed cost = Total cost-variable cost

= 440300-165000*2.42

Fixed cost = 41000

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

Y= a+bx

Y = 41000+2.42X

4. Total overhead cost on 99200 machine hour :

Total overhead cost = (99200*2.42)+41000 = 281064