Terry Lawler, managing director of the Memphis Consulting Group, is examining how overhead costs behave with changes in monthly professional labor-hours billed to clients. Assume the following historical data:

1. Compute the linear cost function, relating total overhead costs to professional labor-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 the Memphis Consulting Group? 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. Lawler had a chance to accept a special job that would have boosted professional labor-hours from 4,000 to 5,000 hours. Suppose Lawler, 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 actuallyforgone?

Transcribed Image Text:

Total Overhead Costs Professional Labor-Hours Billed to Clients 3,000 4,000 5,000 6,000 7,000 8,000 S340,000 400,000 435,000 477,000 529,000 587,000