Question

Question # 7

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

	Level of Activity
	Low	High
Machine-hours	60,000	80,000
Total Manufacturing Overhead Costs	$274,000	$312,000

The manufacturing 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 materials (Variable)	$90,000
Rent (Fixed)	$130,000
Maintenance (Mixed)	$54,000
Total Manufacturing Overhead Costs	$274,000

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 Manufacturing Overhead Cost of $312,000 at the high level of activity consists of maintenance cost.

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

3. What total overhead costs would you expect DHI to incur at an operating level of 65,000 machine-hours?

Answer 1