Estimate how much of the factory overhead cost at the high level of activity consists of maintenance cost.

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 170,000 220,000
Total factory overhead costs ¥ 12,462,000 ¥ 14,238,000

 

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The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 170,000-hour level of activity as follows:

 

Indirect materials (V) ¥ 5,100,000
Rent (F) 5,032,000
Maintenance (M) 2,330,000


Total factory overhead costs ¥ 12,462,000





V = variable; F = fixed; M = mixed.

 

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

 

Required:
1. Estimate how much of the ¥14,238,000 factory overhead cost 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 ¥14,238,000 consists of indirect materials and rent. Think about the behaviour of variable and fixed costs!)

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