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Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the...

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations.

Month Labor-Hours Machine-Hours Overhead Costs
1 725 1,347 $ 102,692
2 710 1,404 103,871
3 675 1,524 109,838
4 740 1,458 108,308
5 785 1,595 116,214
6 755 1,570 114,440
7 730 1,385 107,092
8 730 1,304 102,152
9 710 1,462 106,379
10 800 1,545 113,027
11 670 1,288 102,996
12 705 1,610 116,520


Required:

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.

b. Managers expect the plant to operate at a monthly average of 1,500 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

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Answer 1

Given:

Lowest range Highest range
Cost $      102,996 $       116,520
Hours              1,288               1,610
As per High Low Method,
Variable cost per hour = Change in costs / change in hours
Variable cost per hour = ($ 116520 - $ 102996) / (1610 - 1288)
Variable cost per hour = $ 13524 / 322
Variable cost per hour = $ 42
Fixed Cost = Total Cost - Variable Cost
Fixed Cost = Total Cost - (Variable Cost per hour * hours)
Fixed Cost = $ 116520 - ($ 42 * 1610)
Fixed Cost = $ 48,900

Answer 2

Cost = (1500 * $ 42) + $ 48,900

= $ 111,900

In case of any doubt or clarification, you're welcome to come back via comments.

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