P2-17 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
Machine hours 60,000 80,000
Total factory overhead cost 274,000pessos 312,000pessos
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
Pessos Rent(fixed) 130,000
Total factory overhead costs 274,000 pessos
For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.
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.
Think about the behavior of variable and fixed costs.)
2. Using the high-low method, estimate a cost formula for maintenance.
3. What total overhead costs would you expect the company to incur at an operating level of 65,000 machine-hours?