Reference no: EM132558979

The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the fixed and variable 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                                            Current Year

Months              Machine Hours       Overhead Cost          Machine Hours        Overhead Cost

January                21000                     $84000                 21000                     $86000

February                 25000                  $99000                     24000                  $93000

March                     22000                   $89500                   23000                       $93000

April                          23000               $90000                      22000                      $87000

May                           20500                    $81500                     20000                    $80000

June                            19000                   $75500                     18000                 $76500

July                             14000                     $70500                    12000               $67500

August                           10000                  $64500                    13000                      $71000

September                        12000                   $69000                      15000                    $73500

October                              17000                $75000                     17000                 $72500

November                          16000                     $71500                   15000               $71000

December                             19000                   $78000                   18000                 $75000

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 exceeds 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.

Question 1. Using the high-low method, estimate a manufacturing overhead cost formula.

Question 2. Assume a least-squares regression analysis using all of the given data points estimated the total fixed costs to be $40,102 and the variable costs 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?

Question 3. 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.

Question 4. 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 costs to be $10,090 and the variable costs to be $3.53 per machine-hour.