Question

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.

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