Kenya Bike Limited (KBL) assembles motor bikes using spare parts procured from China. The following data relates to the costs and number of motor bikes assembled in 2015/16 financial year.

Month

Total overheads

Number of bikes assembled

Number of hours taken to assemble the bikes

July

460,000

300

900

August

120,000

220

660

September

480,000

330

990

October

550,000

390

1170

November

570,000

410

1230

December

310,000

240

720

January

440,000

290

870

February

455,000

320

960

March

530,000

380

1140

April

250,000

150

450

May

700,000

450

1350

June

490,000

350

1050

(a)Using the conventional high low cost estimation exercise, determine the cost prediction equation for the company using the number of motor bikes assembled as the independent variable (4 marks)

(b)One of the cost elements included in the total overheads in the table above is supervision costs. When the number of hours taken to assemble the motor bikes exceeds 1000, KBL is forced to hire an additional supervisor hence fixed costs increase by 10% (a step of 10% is noted if more than 1000 hours are used). The variable cost of assembling a motor bike is however not affected by the change in the number of hours. Using the high low method of cost estimation with the number of hours taken to assemble the motor bikes as the independent variable, determine:

-The equation to use to predict costs when the number of hours taken to assemble the motor bikes are less than 1000;(6 marks)

-The equation to use to predict costs when the number of hours taken to assemble the motor bikes are more than 1000;(6 marks)

(c)State two limitations of the high low method of cost estimation and for each limitation suggest the steps that as a manager you can take to overcome it.(4 marks)