Behaviour of variable and fixed costs.
| 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 | ||
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| 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 | |
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| Total factory overhead costs | ¥ | 12,462,000 |
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| 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!) |
