Nova Company\'s total overhead cost at various levels of activity are presented

Question

Nova Company's total overhead cost at various levels of activity are presented below: Month Machine-Hours Total Overhead Cost April May June July 50,000 40,000 60,000 70,000 $204,300 $177,700 $230,900 $257,500 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 40,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) 64,000 59,000 54,700 Total overhead cost $177,700 Nova Company's management wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the $257,500 of overhead cost in July was maintenance cost. (Hint: To do thi s, it may be helpful to first determine how much of the $257,500 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costsl) (Do not round intermediate calculations.) aintenance cost in July

Explanation / Answer

Variable cost - Unilities = 64000/40000 = 1.6 per unit

a)Maintenance cost in July = 257,500 - (1.6*70,000+59,000)

= $86,500

..

b)Variable cost element in Maintenance cost = (257,500-177,700)/(70,000-40,000)

= 79,800/30,000

= 2.66

Fixed cost element = 257,500 - 2.66*70,000

= $71,300

..

c) Company,s total OH cost in linear form y = a + bx

Y = (71300+59000) + (1.6+2.66)*x

Y = 130,300 + 4.26x

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