Echeverria SA is an Argentinian manufacturing company whose total factory overhe

Question

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

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 53,100 machine-hours level of activity as follows:

For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Estimate how much of the factory overhead cost of 281,060 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 281,060 pesos cost consists of indirect materials and rent. Think about the behavior of variable and fixed costs.) (Do not round intermediate calculations. Omit the "pesos" sign in your response.)

Maintenance cost at high level of activity pesos

Low High Machine-hours 53,100 70,800 Total factory overhead costs 250,970 pesos 281,060 pesos

Explanation / Answer

Hi,

Please find the answer as follows:

Indirect Materials Cost Per Unit = 74340/53100 = 1.4 per unit

Maintenance Cost = 281060 - 70800*1.4 (Indirect Material Cost) - 129000 (Rent) = 52940

Thanks.

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