Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhe

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

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:

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

Estimate how much of the $280,900 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 $280,900 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

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

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

     

     

Level of Activity

Low High   Direct labor-hours 47,100 62,800   Total factory overhead costs $ 249,500 $ 280,900

Explanation / Answer

1) Estimate how much of the $280,900 factory overhead cost at the high level of activity consists of maintenance cost.

So answer is $56700

2) Using the high-low method, estimate a cost formula for maintenance.

Y = a+bx

Y = 25300+0.50X

3) Total factory overhead at 51810 direct labour hours

Direct labour hour 47100 62800 Indirect materials (variable) 70650 (70650/47100*62800) = 94200 Rent (fixed) 130000 130000 Maintenance (mixed) 48850 56700 Total factory overhead costs 249500 280900

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