Chapter 5.A, Problem 11C

Case 5A-11 Mixed Cost Analysis and the Relevant Range LO5

The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the variable and fixed components of its monthly manufacturing overhead costs. The company wishes to use machine-hours as its measure of activity and has gathered the data below for this year and last year:

				Last Year			This Year
				Machine	Overhead		Machine	Overhead
Month				Hours	Hours		Hours	Costs
January				21,000	$84,000		21,000	$86,000
February				25,000	$99,000		24,000	$93,000
March				22,000	$89,500		23,000	$93,000
April				23,000	$90,000		22,000	$87,000
May				20,000	$81,000		20,000	$80,000
June				19,000	$75,000		18,000	$76,000
July				14,000	$70,000		12,000	$67,000
August				10,000	$64,000		13,000	$71,000
September				12,000	$69,000		73,000	$73,500
October				17,000	$75,000		17,000	$72,500
November				16,000	$71,500		15,000	$71,000
December				19,000	$78,000		18,000	$75,000

The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 19,500 machine-hours. If the machine-hours used exceed 19,500, then the fee becomes strictly variable with respect to the total number of machine-hours consumed during the month. Lease expense is a major element of overhead cost.<

Required:

Using the high-low method, estimate a manufacturing overhead cost formula in the form Y= a + bX.

Prepare a scatter graph using all of the data for the two-year period. Fit a straight line or lines to the plotted points using a ruler. Describe the cost behavior pattern revealed by your scatter graph plot.
Assume a least-squares regression analysis using all of die given data points estimated the total fixed cost to be $40,102 and the variable cost to be $2.13 per machine-hour. Do you have any concerns about the accuracy of the high-low estimates that you have computed or the least-squares regression estimates that have been provided?
Assume that the company consumes 22,500 machine-hours during a month. Using the high-low method, estimate the total overhead cost that would be incurred at this level of activity. Be sure to consider only the data points contained in the relevant range of activity when performing your computations.
Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis using only the data points in the relevant range of activity estimated the total fixed cost to be $10,090 and the variable cost to be $3.53 per machine-hour.