Problem 2A-8 (Algo) High-Low Method; Predicting Cost [LO2-10]

Nova Companys total overhead cost at various levels of activity are presented below:

Month	Machine- Hours			Total Overhead Cost
April		53,000		$	219,040
May		43,000		$	193,240
June		63,000		$	244,840
July		73,000		$	270,640

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 43,000 machine-hour level of activity is:

Utilities (variable)	$	60,200
Supervisory salaries (fixed)		66,000
Maintenance (mixed)		67,040
Total overhead cost	$	193,240

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

Required:

1. Estimate how much of the $270,640 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $270,640 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 companys 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 48,000 machine-hours?

1. Estimate how much of the $270,640 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $270,640 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.) (Do not round intermediate calculations.)

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.)

3.

Express the companys total overhead cost in the form Y = a + bX. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.

		Variable Cost per
		Machine-Hour		Fixed Cost
Utilities cost
Supervisory salaries cost
Maintenance cost
Total overhead cost		$0.00		$0
Y =		+			X

4. What total overhead cost would you expect to be incurred at an activity level of 48,000 machine-hours? (Do not round intermediate calculations.)