Exercise 5-36 (Algo) Methods of Estimating Costs: High-Low (LO 5-4)

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations.

Month	Labor-Hours			Machine-Hours			Overhead Costs
1		730			1,360		$	102,645
2		725			1,414			103,879
3		690			1,512			109,879
4		735			1,445			108,258
5		780			1,587			116,206
6		760			1,577			114,513
7		740			1,393			107,086
8		725			1,310			102,146
9		710			1,454			106,440
10		790			1,547			113,082
11		670			1,288			101,120
12		715			1,610			114,000

Required:

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.

b. Managers expect the plant to operate at a monthly average of 1,400 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

Managers expect the plant to operate at a monthly average of 1,400 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

	Overhead costs

Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round "Variable cost" answer to 2 decimal places.)

Variable cost (per machine hour)
Fixed cost