Chapter 2, Problem 2.20P

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

Nova Company' s total overhead cost at various levels of activity are presented below:

Assume that the total overhead cost above consists of utilities, supervisory salaries. and maintenance. The breakdown of these costs at the machine-hour level of activity is:

Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $246,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $246,000 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!)
2. Using the high-low method: estimate a cost formula for maintenance.
3. Express the company' s total overhead cost in the linear equation form $Y=a+bX.$
4. What total overhead cost would you expect to be incurred at an activity level of 75,000 machine-hours?