Sawaya Co., Ltd, of Japan, is a manufacturing company whose total factory overhead costs fluctuate considerably from year to yea
r according to increase and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs (in Japanese yen) at high and low levels of activity for recent years are given below:
Low (Level of Activity) High (Level of Activity)
Direct labor-hours 50,000 75,000
Total factory overhead costs Yen 14,250,000 Yen 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) Yen 5,000,000
Rent (fixed) 6,000,000
Maintenance (mixed) Yen 3,250,000
Total factory overhead costs Yen 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.
Required:
1. Estimate how much of the Yen 17,625,000 factory overhead cost at the high level of activity consists of maintenance costs.
2. Using the high-low method, estimate a cost formula for maintenance.
3. What total factory overhead cost would you expect the company to incur at an operating level of 70,000 direct labor-hours?
