# PROBLEM 2–21 High-Low Method; Predicting Cost [LO3, LO4] Golden Company’s total overhead cost at… 1 answer below »

PROBLEM 2–21 High-Low Method; Predicting Cost [LO3, LO4]

Golden Company’s total overhead cost at various levels of activity are presented below:

Month

Machine-Hours

March . . . . . . . . . . . . . . . . . . . .  .

50,000

\$194,000

April . . . . . . . . . . . . . . . . . . . .

40,000

\$170,200

May . . . . . . . . . . . . . . . . . . . . .

60,000

\$217,800

June . . . . . . . . . . . . . . . . . . . . . . . . .

70,000

\$241,600

Assume that the 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 as follows:

The company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1.       Estimate how much of the \$241,600 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the \$241,600 consisted of utili- ties and supervisory salaries. Think about the behavior of variable and fixed costs within the relevant range.)

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

3.       Express the company’s total overhead cost in the form Y = a + bX.

4.       What total overhead cost would you expect to be incurred at an activity level of 45,000 machine-hours?

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