# 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?

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

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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