Problem 120A HighLow Method Predicting Cost LO14 LO15 Nova C

Problem 1-20A High-Low Method; Predicting Cost [LO1-4, LO1-5] Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine-Hours Total Overhead Cost April 54,000 $217,600 May 44,000 $190,600 June 64,000 $244,600 July 74,000 $271,600 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 44,000 machine-hour level of activity is: Utilities (variable) $ 70,400 Supervisory salaries (fixed) 55,000 Maintenance (mixed) 65,200 Total overhead cost $ 190,600 Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the $271,600 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $271,600 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. (Do not round your intermediate calculations. Round the \"Variable cost per unit\" to 2 decimal places.) 3. Express the company’s total overhead cost in the linear equation form Y = a + bX. (Do not round your intermediate calculations. Round the \"Variable cost per unit\" to 2 decimal places.) 4. What total overhead cost would you expect to be incurred at an activity level of 49,000 machine-hours? (Do not round intermediate calculations.)

Solution

1 Maintenance cost = 271600-(70400/44000*74000)-55000= 98200 2 Variable cost per unit = (98200-65200)/(74000-44000)= 1.10 Fixed cost = 98200-(74000*1.1)= 16800 Y = 16800+1.1X 3 Variable cost per unit = 1.1+(70400/44000)= 2.7 Fixed cost = 55000+16800= 71800 Y = 71800+2.7X 4 Total overhead cost = 71800+(49000*2.7)= 204100