Bailey Nickles, managing director of the Vancouver Consulting Group, is examining how overhead costs behave with changes in monthly professional labour-hours billed to clients. Assume the following historical data:

Total Overhead Costs	Professional Labour-Hours Billed to Clients
$340,000	3,000
400,000	4,000
435,000	5,000
477,000	6,000
529,000	7,000
587,000	8,000

Instructions:

1. Compute the linear cost function, relating total overhead costs to physician contact 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 Young and Associates? Why?

2. 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.

3. Dr. Young had a chance to do some school physicals that would have boosted physician contact hours billed to patients from 4,000 to 5,000 hours. Suppose Nickles, 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?