Linear cost approximation. (25 minutes) 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: lop5

REQUIRED 1.
2.
Calculate the linear cost function, relating total overhead cost to professional labour-hours, using the representative observations of 4,000 and 7,000 hours.
Plot the linear cost function. Does the constant component of the cost function represent the fixed overhead costs of Marre-Quise Consultants?
Why?
What would be the predicted total overhead costs for

(a) 5,000 hours and

(b) 8,000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours.
Corneille had a chance to accept a special job that would have boosted professional labour-hours from 4,000 to 5,000 hours. Suppose Corneille, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of BFr 38,000, before deducting the predicted increase in total overhead cost, BFr 43,000. What is the total contribution margin actually forgone?

Transcribed Image Text:

TOTAL OVERHEAD COSTS BFr 340,000 PROFESSIONAL LABOUR-HOURS BILLED TO CLIENTS 3,000 400,000 4,000 435,000 5,000 477,000 6,000 529,000 7,000 587,000 8,000