Chapter 6.A, Problem 11P

Mixed Cost Analysis and the Relevant Range LOS-10
The Ramon Company is a manufacturer tint 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:

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-bows used exceeds 19,500, then the fee becomes strictly variable with respect to the total number of machine-bouts consumed during the month. Lease expense is a major element of overhead cost.

Required:
1. Using the high-low method, estimate a manufacturing overhead cost formula in the form Y = a + bX.
2. Prepare a scattergraph using all of the data for the two-ear period. Fit a straight line or lines to the plotted points using a ruler. Describe the cost behaviour pattern resealed by your scattergraph plot.
3. Assume a least-squares regression analysis using all of the 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 conceits about the accuracy of the high-Low estimates that you have computed or the least-squares regression estimates that have been provided?
4. Assume that the company consumes 22,500 machine-hours during a month. Using the high-low method, estimate the total overhead costthat 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.
5. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis using only the data points in therelevant range of activity estimated the total fixed cost tobe $10,090 and the variable cost to be $3.53 per machine-hour.