$5).$ Problem $3-17$ High$$Low Method; Predicting Cost $[$LO$1,$ LO$2]15$ marks

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:

Level of Activity

Low High

Machine$-$hours $82,00092,000$

Total factory overhead costs $$35,230,000$ $$37,380,000$

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the $82,000$ machine$-$hours level of activity as follows:

Indirect materials $($variable$)$ $$12,546,000$

Rent $($fixed$)13,600,000$

Maintenance $($mixed$)9,084,000$

Total factory overhead costs $$35,230,000$

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 factory overhead cost of $$37,380,000$ at the high level of activity consists of maintenance cost. $5$ marks

$2.$ Using the high$$low method, estimate a cost formula for maintenance. $5$ marks

$3.$ What total overhead costs would you expect the company to incur at an operating level of $87,000$ machine$-$hours? $5$ marks