Colby Limited is a 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 at high and low levels of activity over 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 machine-hours level of activity as follows:

For planning purposes, the company want~ to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the factory overhead cost of $17,625,000 at the high level of activity consists of maintenance cost.

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

3. What total overhead costs would you expect the company to incur at an operating level of 70,000 machine-hours?

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Level of Activity Low High 75,000 $17,625,000 Machine-hours.... Total factory overhead costs 50,000 ...... $14,250,000 Indirect materials (variable). . . . Rent (fixed) . .. .. Maintenance (mixed).... Total factory overhead costs $ 5,000,000 6,000,000 3,250,000 ... $14,250,000