Pelican Inc. is a manufacturing company whose total factory overhead costs fluct

Question

Pelican Inc. is a manufacturing company whose total factory overhead costs fluctuate somewhat from month to month according to the number of machine-hours worked in its production facility. These costs for the last four months in 2014 are given below Machine-hours Total factory overhead September October November December 6,500 8,500 5,000 10,000 $ 108,900 $ 127,100 $ 88,000 $ 108,000 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 5,000 machine-hours level of activity as follows Indirect materials (variable) Rent (fixed) Maintenance (mixed) Total factory overhead costs 34,000 50,000 $ 88,000 Assume that all data are within the relevant range, using the high-low method how much maintenance cost would you expect the company to incur at an operating level of 7,000 machine-hours? (Round to the nearest dollars.) A. $ 54,400 56,400 62,000 66,000 E. None of the above

Explanation / Answer

Calculate maintenance cost :

Variable maintenance per machine hour = (66000-50000)/(10000-5000) = 3.2 per machine hour

Fixed cost = 66000-32000 = 34000

Maintenance cost on 7000 Machine hour = (7000*3.2+34000) = $56400

So answer is b) $56400

5000 Machine hour 10000 machine hour Indirect material 4000 4000/5000*10000 = 8000 Rent 34000 34000 Maintenance 50000 66000 Total 88000 108000

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