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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.
Month
Total overheads
Number of bikes assembled
Number of hours taken to assemble the bikes
July
460,000
300
900
August
120,000
220
660
September
480,000
330
990
October
550,000
390
1170
November
570,000
410
1230
December
310,000
240
720
January
440,000
290
870
February
455,000
320
960
March
530,000
380
1140
April
250,000
150
450
May
700,000
1350
June
490,000
350
1050
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.
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