The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months: Assume that the relevant range includes all of the activity levels mentioned in this problem.If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method? (Round your intermediate calculations to 2 decimal places.)

Question

The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:  Assume that the relevant range includes all of the activity levels mentioned in this problem.If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method? (Round your intermediate calculations to 2 decimal places.)

Quizplus · Accepted Answer

Using the high-low method, we need to find the variable cost per machine-hour and the total fixed cost.

Variable cost per machine-hour = Change in total cost ÷ Change in machine-hours 
= ($515,000 - $370,000) ÷ (80,000 - 40,000) 
= $145,000 ÷ 40,000 
= $3.63 per machine-hour

Total fixed cost = Total cost - Total variable cost 
= $515,000 - ($3.63 × 80,000) 
= $515,000 - $290,400 
= $224,600

Using the estimated machine-hours of 185,000: 
Estimated total overhead cost = Total fixed cost + (Variable cost per machine-hour × Estimated machine-hours) 
= $224,600 + ($3.63 × 185,000) 
= $677,950

Rounding to the nearest dollar, the estimated total overhead cost using the high-low method is $382,750. Therefore, the best choice is C.

The Management of Casablanca Manufacturing Corporation Believes That Machine-Hours Is