Chapter 2A, Problem 2A.8P

High-Low Method; Predicting Cost LO2—10

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 60,000 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 in the form $Y=a+bX$.
3. Express the company’s total overhead cost in the form $Y=a+bX$.
4. What total overhead cost would you expect to be incurred at an activity level of 75,000 machine-hours?