Chapter 2, Problem 2.17P

High-Low Method; Predicting Cost [LO 2-4, LO 2-5]

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:

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 50,000-hour level of activity as follows:

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 $17,7625,7000 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 $17,625,000 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.
3. What total factory overhead costs would you expect the company to incur at an operating level of 70,000 direct labor-hours?