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 labour-hours worked in the factory. Total factory overhead costs (in Japanese yen, denoted ¥) at high and low levels of activity for recent years are provided below: Level of Activity Low High Direct labour-hours 160,000 210,000 Total factory overhead costs ¥ 12,478,000 ¥ 14,338,000 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 160,000-hour level of activity as follows: Indirect materials (V) ¥ 5,120,000 Rent (F) 5,027,000 Maintenance (M) 2,331,000 Total factory overhead costs ¥ 12,478,000 V = variable; F = fixed; M = mixed. To have data available for planning, the company wants to break the maintenance cost down into its variable and fixed cost elements.
Task
i. Estimate how much of the ¥14,338,000 factory overhead cost at the high level of activity consists of maintenance cost.
ii. By means of the high-low method of cost analysis, estimate a cost formula for maintenance.
iii. What total factory overhead costs would you expect the company to incur at an operating level of 79,000 direct labour-hours?