Problem 5 (Linear Cost Approximation) Tita Lopez, managing director of the ABS Consulting Group, is examining how overhead costs behave with variations in monthly professional labor- hours billed to clients. Assume the following historical data: Total Overhead Costs P340,000 400,000 435.000 477,000 529.000 587.000 Professional Labor-Hours Billed to Clients 3,000 4,000 5,000 6.000 7,000 8,000 Required: 1. Compute the linear cost function, relating total overhead cost to professional labor-hours, using` the representative observations of 4,000 and 7,000 hours. Plot the linear cost function. component of the cost function represent the fixed overhead costs of the - ABS Consulting Group? Why? Does the constant 2. What wouid be the predicted total overhead costs for (a) 5,000 hours, and (b) 8,000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours. 3. Lopez had a chance to accept a special job that would have boosted professional labor-hours from 4,000 to 5,000 hours. Suppose Lopez, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of P38,000, before deducting the predicted increase in total overhead cost, P43,000. What is the total contribution margin actually forgone?
Problem 5 (Linear Cost Approximation) Tita Lopez, managing director of the ABS Consulting Group, is examining how overhead costs behave with variations in monthly professional labor- hours billed to clients. Assume the following historical data: Total Overhead Costs P340,000 400,000 435.000 477,000 529.000 587.000 Professional Labor-Hours Billed to Clients 3,000 4,000 5,000 6.000 7,000 8,000 Required: 1. Compute the linear cost function, relating total overhead cost to professional labor-hours, using` the representative observations of 4,000 and 7,000 hours. Plot the linear cost function. component of the cost function represent the fixed overhead costs of the - ABS Consulting Group? Why? Does the constant 2. What wouid be the predicted total overhead costs for (a) 5,000 hours, and (b) 8,000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours. 3. Lopez had a chance to accept a special job that would have boosted professional labor-hours from 4,000 to 5,000 hours. Suppose Lopez, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of P38,000, before deducting the predicted increase in total overhead cost, P43,000. What is the total contribution margin actually forgone?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 5 (Linear Cost Approximation)
Tita Lopez, managing director of the ABS Consulting Group, is examining
how overhead costs behave with variations in monthly professional labor-
hours billed to clients. Assume the following historical data:
Professional Labor-Hours
Billed to Clients
Total
Overhead Costs
P340,000
400.000
435,000
477,000
529.000
587.000
3,000
4,000
5,000
6.000
7,000
8.000
Required:
1. Compute the linear cost function, relating total overhead cost to
professional labor-hours, using the representative observations of 4,000
and 7,000 hours.
component of the cost function represent the fixed overhead costs of the
ABS Consulting Group? Why?
Plot the linear cost function. Does the constant
What wouid be the predicted total overhead costs for (a) 5,000 hours, and
(b) 8.000 hours using the cost function estimated in requirement 1? Plot
the predicted costs and actual costs for 5,000 and 8,000 hours.
3. Lopez had a chance to accept a special job that would have boosted
professional labor-hours from 4,000 to 5,000 hours. Suppose Lopez,
guided by the linear cost function, rejected this job because it would have
brought a total increase in contribution margin of P38,000, before
deducting the predicted increase in total overhead cost, P43,000. What is
the total contribution margin actually forgone?
2.
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