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:

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 52,800-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.

Required:

1. Estimate how much of the $328,860 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 $328,860 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

2. Using the high-low method, estimate a cost formula for maintenance. (Round the Variable cost per DLH to 2 decimal places.)

3. What total factory overhead costs would you expect the company to incur at an operating level of 58,080 direct labor-hours? (Do not round intermediate calculations.)

Level of Activity Low High Direct labor-hours 52,800 70,400 Total factory overhead costs $ 286,620 $ 328,860

Explanation / Answer

1. Estimate how much of the $328,860 factory overhead cost at the high level of activity consists of maintenance cost :

2) estimate cost formula :

Y = 34900+0.60X

3. What total factory overhead costs would you expect the company to incur at an operating level of 58,080 direct labor-hours?

Total factory overhead = (58080*.60+34900) = 69748

Indirect materials (variable) 126720 Rent (fixed) 125000 Maintenance (mixed) 77140 Total factory overhead 328860

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