Question

High–Low Method; Predicting Cost
Prince Company’s total overhead costs at various levels of activity are presented below:
   labour    overhead
Month    Hours    Cost
September . . . . . . . . . . . . . . . . . . 100,000 $388,000
October . . . . . . . . . . . . . . . . . . . . . 80,000    $340,400
November . . . . . . . . . . . . . . . . . . . 135,000 $485,600
December . . . . . . . . . . . . . . . . . . . 140,000 $483,200
Assume that the overhead cost above consists of utilities, supervisory salaries, depreciation,
and maintenance. The breakdown of these costs at the 80,000-machine-hour level of activity in
October is as follows:
Utilities (variable) . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,000
Supervisory salaries
and depreciation (fixed). . . . . . . . . . . . . . . . . . 120,000
Maintenance (mixed) . . . . . . . . . . . . . . . . . . . . . . . 116,400
Total overhead cost . . . . . . . . . . . . . . . . . . . . . . . . . $340,400
The company wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the $483,200 of overhead cost in December was maintenance cost.
( Hint : To do this, first determine how much of the $483,200 consisted of utilities and supervisory
salaries. Think about the behaviour of variable and fixed costs within the relevant
range.)
2. Using the high–low method, estimate a cost formula for maintenance.
3. Express the company’s 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 90,000
machine-hours?

Answer 1