Question

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below:

	Level of Activity
	Low				High
Direct labor-hours		52,800			70,400
Total factory overhead costs	$	286,620		$	328,860

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 52,800-hour level of activity as follows:

Indirect materials (variable)	$	95,040
Rent (fixed)		125,000
Maintenance (mixed)		66,580
Total factory overhead costs	$	286,620

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $328,860 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $328,860 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

2. Using the high-low method, estimate a cost formula for maintenance. (Round the Variable cost per DLH to 2 decimal places.)

	Direct Labor-Hours	Maintenance Cost
High level of activity
Low level of activity
Change	0	$0
Variable cost element		per DLH
Fixed cost element

Y =

+

X

3. What total factory overhead costs would you expect the company to incur at an operating level of 58,080 direct labor-hours? (Do not round intermediate calculations.)

Answer 1

1. Estimate how much of the $328,860 factory overhead cost at the high level of activity consists of maintenance cost :

Indirect materials (variable)	126720
Rent (fixed)	125000
Maintenance (mixed)	77140
Total factory overhead	328860

2) estimate cost formula :

	Direct Labor-Hours Maintenance Cost High level of activity 70400 77140 Low level of activity 52800 66580 Change 17600 $10560 Variable cost element 0.60 per DLH Fixed cost element 34900

Y = 34900+0.60X

3. What total factory overhead costs would you expect the company to incur at an operating level of 58,080 direct labor-hours?

Total factory overhead = (58080*.60+34900) = 69748