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 amortization was $60,000 (all fixed). The balance of the overhead costs 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.

-What is the variable cost for maintenance per machine hour?
A) $0.75.
B) $1.30.
C) $1.35.
D) $1.44.

Question

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 amortization was $60,000 (all fixed). The balance of the overhead costs 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.

-What is the variable cost for maintenance per machine hour?
A) $0.75.
B) $1.30.
C) $1.35.
D) $1.44.

Quizplus · Accepted Answer

The variable cost for maintenance per machine hour is calculated by finding the change in maintenance costs divided by the change in machine hours. The change in maintenance costs is $130,000 - ($223,000 - $48,000 - $60,000) = $130,000 - $115,000 = $15,000. The change in machine hours is 100,000 - 80,000 = 20,000. Therefore, the variable cost per machine hour is $15,000 / 20,000 = $0.75.

In the O'Donnell Manufacturing Company, at an Activity Level of 80,000