Problem 5A-8 High-Low Method; Predicting Cost [LO5-10]

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

Month	Machine- Hours			Total Overhead Cost
April		52,000		$	207,440
May		42,000		$	181,740
June		62,000		$	233,140
July		72,000		$	258,840

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 42,000 machine-hour level of activity is:

Utilities (variable)	$	63,000
Supervisory salaries (fixed)		56,000
Maintenance (mixed)		62,740
Total overhead cost	$	181,740

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

Required:

1. Estimate how much of the $258,840 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $258,840 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 47,000 machine-hours?