Question

The highest and lowest levels of activity for the Felton Company were 58,000 direct labor hours and 42,000 direct labor hours, respectively. Maintenance costs were $336,000 at the 58,000-hour level and $304,000 at the 42,000-hour level.

a. Compute the maintenance cost formula.

b. What cost might we expect at an operating level of 52,000 direct labor hours?

Answer 1

a. Compute the maintenance cost formula

Maintainance cost = $220,000 + $ 2.00 × Number of direct labour hours.

b. cost at an operating level of 52,000 direct labor hours

$324,000

Step-by-step explanation:

a. Compute the maintenance cost formula

Maintainance Cost is a semi-variable cost. This means it has a fixed cost element and a variable cost element.

Cost separation of Maintainance cost is done by using the high - low method as follows :

Variable cost element = difference in Overhead (High - Low)/ difference in Acitivity (High - Low)

= $336,000 - $304,000 / 58,000 - 42,000

= $ 2.00 per direct labour hour

Fixed cost element = Total Overhead - Variable Cost at given activity level

activity level of 58,000 hrs produce the following results

Fixed cost element = $336,000 - $ 2.00 × 58,000

= $220,000

Maintainance cost = $220,000 + $ 2.00 × Number of direct labour hours.

b. cost at an operating level of 52,000 direct labor hours

Maintainance cost = $220,000 + $ 2.00 × Number of direct labour hours.

= $220,000 + $ 2.00 × 52,000

= $324,000

Answer 2

A. $32,000

B. $324,000

Step-by-step explanation:

See attached file