Question

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

Month	Machine- Hours			Total Overhead Cost
April		48,000		$	217,820
May		38,000		$	190,420
June		58,000		$	245,220
July		68,000		$	272,620

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 38,000 machine-hour level of activity is:

Utilities (variable)	$	57,000
Supervisory salaries (fixed)		70,000
Maintenance (mixed)		63,420
Total overhead cost	$	190,420

Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $272,620 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $272,620 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 in the form Y = a + bX.

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 43,000 machine-hours?

Answer 1