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Question: sawaya co ltd of japan is a manufacturing company whose...

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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

Low High
  Direct labor-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-hour 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  

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

1.

Estimate how much of the $17,625,000 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 $17,625,000 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!)

     

2.

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

        
       

3.

What total factory overhead costs would you expect the company to incur at an operating level of 70,000 direct labor-hours?

     

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