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:

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 exceed 19,500, then the fee becomes strictly variable with respect to the total number of machine-hours used during the month. Lease expense is a major element of overhead cost.

Required:
I. 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. Describe the cost behaviour pattern revealed by your scattergraph plot.
3. Based on (2), do you have any concerns about the accuracy of the high-low estimates that you computed?
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.

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Month January February March April May June July August September October November December Last Year Machine- Hours 21,000 25,000 22,000 23,000 20,500 19,000 14,000 10,000 12,000 17,000 16,000 19,000 Overhead Costs $84,000 99,000 89.500 90,000 81,500 75,500 70.500 64,500 69.000 75,000 71,500 78,000 This Year Machine- Hours 21,000 24,000 23,000 22,000 20,000 18,000 12,000 13,000 15,000 17,000 15,000 18,000 Overhead Costs $86,000 93,000 93,000 87,000 80.000 76,500 67,500 71,000 73,500 72,500 71,000 75,000