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Coral, Inc. manufactures a variety of products. The following data pertains to its plant in Chennai, India, which is relatively new and manufactures auto parts. Management wants to better understand the behaviour of overhead costs in order to better estimate and manage these costs. Management believes that direct labour-hours are a good driver of overhead costs; moreover labour hours-data is readily available. Historical data for the past two years is available and is as follows:

All equipment in the Chennai plant is leased under an arrangement calling for a flat fee up to 70,000 direct labour-hours of activity in the plant, after which lease charges are assessed on an hourly basis. Lease expense is a major item of overhead cost.

Required:

Complete requirements 1 and 2 using data for each year as well as the full two-year period.

1. Using the high?low method, estimate the cost formula for overhead in the Chennai plant.

2. Using the least-squares regression method, estimate the cost formula for overhead in the Chennai plant.

3. Assume that the Chennai plant works 78,750 and 54,500 direct labour-hours respectively during two different months. Compute the expected overhead cost for the month using the cost formulas developed for the two-year period with

a. The high?low method.

b. The regression method.

4. Of the two proposed methods, which one should Coral, Inc. use to estimate monthly overhead costs in the Chennai plant? Explain fully, indicating the reasons why the other method is less desirable.

5. How is the concept of relevant range applicable to the Chennai plant?

Transcribed Image Text:

Year 1 Year 2 Direct Labour- Direct Labour- Overhead Cost Overhead Cost Hours Hours $840,000 990,450 855,000 January $860,450 70,000 73,500 84,000 February March 87,500 928,450 77,000 80,500 77,000 940,400 870,000 April 80,500 902,250 Year 1 Year 2 Direct Labour- Overhead Cost Direct Labour- Overhead Cost Hours Hours May 70,000 815,000 70,000 800,000 June 66,500 735,850 63,000 775,000 July 49,000 745,000 42,000 675,000 August 35,000 645,000 45,500 700,900 September 42,000 690,000 52,500 735,000 Otober 59,500 750,000 59,500 725,850 November 56,000 695,000 52,500 710,000 December 66,500 780,000 63,000 718,000