Estimate the total overhead cost that would be incurred

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Reference no: EM132725383

Problem - CASE - Mang Jose Company is a factory 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 (please see attached photo for table) for this year and last year:

The company leases all of its factory 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.

Here are the questions posed:

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

2. Illustrate 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 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 concerns 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 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.

5. 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.

Reference no: EM132725383

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