Question

Colby Limited is a manufacturing company whose total factory overhead costs fluctuate somewhat from year to year, according to the number of machine-hours worked in its production facility. These costs at high and low levels of activity over recent years are given below:

 

	Low	High
Machine-hours	50,000	75,000
Total factory overhead costs	$14,250,000	$17,625,000

 

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 50,000 machine-hours level of activity as follows:

 

Indirect materials (variable)	$5,000,000
Rent (fixed)	6,000,000
Maintenance (mixed)	3,250,000
Total factory overhead costs	$14,250,000

 

For planning purposes, the company want~ to break down the maintenance cost into its variable and fixed cost elements.

 

Required:

Estimate how much of the factory overhead cost of $17,625,000 at the high level of activity consists of maintenance costs.

Answer 1

Maintenance cost at the 75,000 machine-hour level of activity can be isolated as follows:

 

	Level of Activity
	50,000 MHs	75,000 MHs
Total factory overhead cost	$14,250,000	$17,625,000
Deduct:
Indirect materials @ $100 per MH*	$5,000,000	$7,500,000
Rent	$6,000,000	$6,000,000
Maintenance cost	$3,250,000	$4,125,000

* $5,000,000 ÷ 50,000 MHs = $100 per MH

	Low level	High level
Maintenance cost	$3,250,000	$4,125,000