Question

Echeverria SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year...

Echeverria SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number of machine-hours worked in its production facility. These costs (in Argentinian pesos) at high and low levels of activity over recent years are given below:

Level of Activity

Level of Activity

Low

High

Machine-hours

60,000

80,000

Total factory overhead costs

274,000 pesos

312,000 pesos

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 60,000 machine-hours level of activity as follows:

Indirect material (variable)

90,000 pesos

Rent (fixed)

130,000

Maintenance (mixed)

54,000

Total factory overhead costs

274,000 pesos

For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.  Required:

1. Estimate how much of the factory overhead cost of 312,000 pesos 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 312,000 pesos cost consists of indirect materials and rent. Think about the behavior of variable and fixed costs.)

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

Homework Answers

Answer #1
Indirect material (90000/60000)= 1.5 per machine hour
1) Indirect materials (80,000*1.5) 120000
Rent (fixed) 130,000
Maintenance cost (balancing figure) 62,000 answer
Total 312,000
2) hours cost
high 80,000 62,000
low 60,000 54,000
difference 20,000 8,000
Variable cost per hour = 8000/20000
0.4
fixed cost             = 62000 -80000*.4
30000
cost formula   = 30,000 + $0.4 x answr
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