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?

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

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

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