Question

Problem 5-53 High-Low Method, Scattergraph (LO 5-4) Academy Products manufactures a variety of custom components for use in aircraft navigation and communications systems. The controller has asked for your help in estimating fixed and variable overhead costs for Academy's Rio Puerco plant. The controller tells you that the best cost driver for estimating overhead is machine-hours. Monthly data on machine-hours and overhead costs for the last year have been collected and are shown below: Month Machine-Hours 710,000 980,000 805,000 745,000 1,075,000 880,000 790,000 855,000 1,015,000 720,000 755,000 780,000 Overhead Costs $ 714,000 2,250,000 1,300,000 860,000 3,780,000 1,480,000 1,180,000 1,580,000 2,580,000 920,000 1,060,000 990,000 11 12 Required: a. Estimate the monthly fixed costs and the unit variable cost per machine-hour using the high-low estimation method. (Round variable cost per unit to 1 decimal place.) Overhead costs = per MH > Machine hour

Answer 1

Part A

Overhead costs =

$(5250000)

+

$8.40 per MH x Machine hour

Variable cost = (cost at highest level of activity – cost at lowest level of activity)/(highest activity – lowest activity) = (3780000-714000)/(1075000-710000) = $8.40 per machine hour

Fixed cost = total cost – total variable cost = 714000-(710000*8.40) = $(5250000)

Part B