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 This Year
Month Machine- Hours Overhead Costs Machine- Hours Overhead Costs
January 21,000 $ 84,000 21,000 $ 86,000
February 25,000 $ 99,000 24,000 $ 93,000
March 22,000 $ 89,500 23,000 $ 93,000
April 23,000 $ 90,000 22,000 $ 87,000
May 20,500 $ 81,500 20,000 $ 80,000
June 19,000 $ 75,500 18,000 $ 76,500
July 14,000 $ 70,500 12,000 $ 67,500
August 10,000 $ 64,500 13,000 $ 71,000
September 12,000 $ 69,000 15,000 $ 73,500
October 17,000 $ 75,000 17,000 $ 72,500
November 16,000 $ 71,500 15,000 $ 71,000
December 19,000 $ 78,000 18,000 $ 75,000
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.
1. Using the high- low method, estimate a manufacturing overhead cost formula.
2. Prepare a scattergraph 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 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?
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 costs to be $ 10,090 and the variable costs to be $ 3.53 per machine- hour.
See attached Excel file for tutorial.