2. 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

Current Year

Months

Machine Hours

Overhead Cost

Machine Hours

Overhead Cost

January

21000

$84000

21000

$86000

February

25000

$99000

24000

$93000

March

22000

$89500

23000

$93000

April

23000

$90000

22000

$87000

May

20500

$81500

20000

$80000

June

19000

$75500

18000

$76500

July

14000

$70500

12000

$67500

August

10000

$64500

13000

$71000

September

12000

$69000

15000

$73500

October

17000

$75000

17000

$72500

November

16000

$71500

15000

$71000

December

19000

$78000

18000

$75000

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.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?

3.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.

4.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.