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Echeverria SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number ...

Question:

Echeverria SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number of machine-hours worked in its production facility. These costs (in Argentinian pesos) at high and low levels of activity over recent years are given below:

                                                                                Level of Activity

                                                                                Low                       High      

  Machine-hours                                               60,000                  80,000   

  Total factory overhead costs                    274,000  pesos  312,000  pesos

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 60,000 machine-hours level of activity as follows:

  Indirect materials (variable)     90,000   pesos

  Rent (fixed)                                     130,000

  Maintenance (mixed)                  54,000  

   Total factory overhead costs   274,000  pesos

For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1.            Estimate how much of the factory overhead cost of 312,000 pesos 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 312,000 pesos cost consists of indirect materials and rent.

2.            Using the high-low method, estimate a cost formula for maintenance. (X represent per machine-hour)

 3.           What total overhead costs would you expect the company to incur at an operating level of 65,000 machine-hours?