Reference: 06-04
In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were
$223,000. Of this amount, utilities were $48,000 (all variable) and depreciation was $60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were $130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.
-The variable cost for maintenance per machine hour is?
A)$1.35.
B)$1.30.
C)$0.75.
D)$1.44.

Question

Quizplus · Accepted Answer

The variable cost for maintenance per machine hour can be calculated by first determining the total variable costs at both activity levels and then finding the difference in maintenance costs. Since utilities are all variable and given as $48,000, and since depreciation is all fixed, it does not change with the level of activity. Therefore, the change in total costs from 80,000 to 100,000 machine hours is due to the variable component of maintenance costs. At 80,000 hours, the total costs were $223,000, and at 100,000 hours, maintenance costs alone were $130,000. However, to find the variable cost per machine hour for maintenance, we need to know the total variable costs at both levels, which isn't directly provided for the 80,000-hour level. The key is to recognize that without the specific total costs at 100,000 hours, we focus on the incremental change in maintenance costs as the activity level increases, assuming all other variable costs (like utilities) increase proportionally. Given the information, we directly calculate the variable cost per machine hour for maintenance based on the change in machine hours and the given maintenance cost at one level, but the question does not provide enough specific data to directly calculate this without making assumptions about the total variable costs at both activity levels. Therefore, the calculation involves understanding that the variable cost per machine hour is derived from the change in variable costs (in this case, implied to be solely from maintenance due to the lack of other variable cost data) over the change in machine hours.

Reference: 06-04 in the O'Donnell Manufacturing Company, at an Activity Level of Level