Question

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below:

	Level of Activity
	Low		High
Direct labor-hours		47,100		62,800
Total factory overhead costs	$	245,580	$	273,840

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 47,100-hour level of activity as follows:

Indirect materials (variable)	$	61,230
Rent (fixed)		127,000
Maintenance (mixed)		57,350
Total factory overhead costs	$	245,580

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1.

Estimate how much of the $273,840 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $273,840 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

Maintenance cost at high level of activity_________

2.	Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations. Round "Variable cost element" to 2 decimal places.)

	Direct Labor-Hours Maintenance Cost High level of activity Low level of activity Change Variable cost element per DLH Fixed cost element

Y =_____ +______X

3.	What total factory overhead costs would you expect the company to incur at an operating level of 51,810 direct labor-hours? (Do not round intermediate calculations.)

Total Factory overhead cost____

Answer 1

1	Computation of Maintainance cost
		47,100 hours	62,800 hours
	Total Factory overhead cost	$2,45,580	$2,73,840
	Less:Rent	$1,27,000	$1,27,000
	Less:Indirect Material($1.30 per hour)	$61,230	$81,640
	Maintainance cost	$57,350	$65,200
	Variable maintainance cost per unit =($65,200 - $57,350) / (62,800 - 47,100)
	Variable maintainance cost per unit =$7,850 / 15,700 hours =$0.50 per hour
2		Direct labor hours	Maintainance cost
	High level of activity	62,800	$65,200
	Low level of activity	47,100	$57,350
	Change	15,700	$7,850
	Variable maintainance cost per unit =$7,850 / 15,700 hours =$0.50 per hour
	Fixed cost element =$65,200 - (62,800 hours*$0.50)
	Fixed cost element =$65,200 - $31,400 =$33,800
	Y =$33,800 + $0.50X
3	Total Factory Overhead cost
		Direct labor hours	Factory OH cost
	High level of activity	62,800	$2,73,840
	Low level of activity	47,100	$2,45,580
	Change	15,700	$28,260
	Variable maintainance cost per unit =$28,260 / 15,700 hours =$1.80 per hour
	Fixed cost element =$273,840 - (62,800 hours*$1.80)
	Fixed cost element =$273,840 - $113,040 =$160,800
	Y =$160,800 + $1.80X
	Total Factory Overhead cost =$160,800 + 51,810 hours*$1.80 =$254,058