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		46,000		$	179,200
May		36,000		$	156,700
June		56,000		$	201,700
July		66,000		$	224,200

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:

Utilities (variable)	$	43,200
Supervisory salaries (fixed)		61,000
Maintenance (mixed)		52,500
Total overhead cost	$	156,700

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

Required:

1. Estimate how much of the $224,200 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $224,200 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 41,000 machine-hours?