Reference no: EM133016922

Question - Kenya Bike Limited (KBL) assembles motor bikes using spare parts procured from China. The following data relates to the costs and number of motor bikes assembled in 2015/16 financial year.

Required -

(a) Using the conventional high low cost estimation exercise, determine the cost prediction equation for the company using the number of motor bikes assembled as the independent variable.

(b) One of the cost elements included in the total overheads in the table above is supervision costs. When the number of hours taken to assemble the motor bikes exceeds 1000, KBL is forced to hire an additional supervisor hence fixed costs increase by 10% (a step of 10% is noted if more than 1000 hours are used). The variable cost of assembling a motor bike is however not affected by the change in the number of hours. Using the high low method of cost estimation with the number of hours taken to assemble the motor bikes as the independent variable, determine:

- The equation to use to predict costs when the number of hours taken to assemble the motor bikes are less than 1000;

- The equation to use to predict costs when the number of hours taken to assemble the motor bikes are more than 1000;

(c) State two limitations of the high low method of cost estimation and for each limitation suggest the steps that as a manager you can take to overcome it.