Pierre Corneille, managing director of Marre-Quise Consultants SA, is examining how overhead costs behave with variations in monthly professional labour-hours billed to clients. Assume the following historical data:

Total Professional labour-hours

overhead costs billed to clients

€340000..................................3000

400000....................................4000

435000....................................5000

477000....................................6000

529000....................................7000

587000....................................8000

Required

1. Calculate the linear cost function, relating total overhead cost to professional labourhours, using the representative observations of 4000 and 7000 hours. Plot the linear cost function. Does the constant component of the cost function represent the fixed overhead costs of Marre-Quise Consultants? Why?

2. What would be the predicted total overhead costs for (a) 5000 hours and (b) 8000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5000 and 8000 hours.

3. Corneille had a chance to accept a special job that would have boosted professional labour-hours from 4000 to 5000 hours. Suppose Corneille, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of €38 000, before deducting the predicted increase in total overhead cost, €43 000. What is the total contribution margin actually forgone?