Question 1: Cost Behaviour and Mixed Costs McInerney Ltd is a manufacturer that is interested in developing a cost formula to estimate the variable and fixed 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 This Year

Month Machine hours Overhead Costs Machine hours Overhead Costs

Jan 21,000 $84,000 21,000 $86,000

Feb 25,000 $99,000 24,000 $93,000

Mar 22,000 $89,500 23,000 $93,000

Apr 23,000 $90,000 22,000 $87,000

May 20,500 $81,500 20,000 $80,000

Jun 19,000 $75,500 8,000 $76,500

Jul 14,000 $70,500 12,000 $67,500

Aug 10,000 $64,500 13,000 $71,000

Sep 12,000 $69,000 15,000 $73,500

Oct 17,000 $75,000 17,000 $72,500

Nov 16,000 $71,500 15,000 $71,000

Dec 19,000 $78,000 18,000 $75,000

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 machinehours consumed during the month. Lease expense is a major element of overhead cost.

Required:

a. Using the high-low method, estimate a manufacturing overhead cost formula in the form Y = a + bX.

b. Prepare a scattergraph using all of the data for the two-year period. Fit a straight line or lines to the plotted points using a ruler. Describe the cost behavior pattern revealed by your scattergraph plot.

c. Assume a least-squares regression analysis using all of the given data points estimated the total fixed cost to be $40,102 and the variable cost to be $2.13 per machine-hour. Do you have any concerns about the accuracy of the high-low estimates that you have calculated?

d. 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 calculations.

e. 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 cost to be $10,090 and the variable cost to be $3.53 per machine-hour.