Outside Environment, Inc. provides commercial landscaping services in San Diego. Sasha Cairns, the firm's owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm's costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping.

Direct Material	$390
Direct Labor (5 Direct Labor hours at $11 per hour	55
Overhead ( at $18 per direct-labor)	90
Total Cost per 1,000 square feet	535

Cairns is quite certain about the estimates for direct material and direct labor. However, she is not as comfortable with the overhead estimate. The estimate for overhead is based on the overhead costs that were incurred during the past 12 months as presented in the following schedule. The estimate of $18 per direct-labor hour was determined by dividing the total overhead costs for the 12-month period ($1,296,000) by the total direct-labor hours (72,000).

	Total Overhead	Regular Direct Labor Hours	Overtime Direct Labor Hours*
Jan	108,000	5,820	380
Feb	94,000	4,760	40
March	96,000	4,420	80
April	112,000	5,180	420
May	114,000	6,060	940
June	130,000	6,480	1,520
July	128,000	6,760	1,240
Aug	112,000	6,100	700
Sept	106,000	5,520	80
Oct	94,000	5,540	60
Nov	94,000	4,240	60
Dec	108,000	5,120	480
Total	1,296,000	66,000	6,000

*The Overtime premium is 50% of the direct labor wage rate.

Cairns believes that overhead is affected by total monthly direct-labor hours. Cairns decided to perform a least-squares regression of overhead (OH) on total direct-labor hours (DLH).

1. Develop cost formula for overhead cost using least square regression method by constructing excel spreadsheet.

2. The overhead rate developed from the least-squares regression is different from Cairns' preliminary estimate of $18 per direct-labor hour. Explain the difference in the two overhead rates.

3. Using the overhead formula that was derived from the least-squares regression, determine a total variable-cost estimate for each 1,000 square feet of landscaping.

4. Cairns has been asked to submit a bid on a landscaping project for the city government consisting of 50,000 square feet. Cairns estimates that 30 percent of the direct-labor hours required for the project will be on overtime. Calculate the incremental costs that should be included in any bid that Cairns would submit on this project. Use the overhead formula derived from the least-squares regression.

5. Should management rely on the overhead formula derived from the least-squares regression as the basis for the variable overhead component of its cost estimate? Explain your answer.