Reference no: EM131806221

Problem - 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 (in Japanese yen, denoted ) 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.

Requirement 1: Estimate how much of the 17,625,000 factory overhead cost at the high level of activity consists of maintenance cost.

Requirement 2: Using the high-low method, estimate a cost formula for maintenance where X represents the number of direct-labor hours.

Requirement 3: What total factory overhead costs would you expect the company to incur at an operating level of 70,000 direct labor-hours?