I have one and two, can you please help me with 3, 4 and 5? Thank you. CASE 2-26
ID: 340669 • Letter: I
Question
I have one and two, can you please help me with 3, 4 and 5? Thank you. CASE 2-26 Mixed Cost Analysis and the Relevant Range [L02-4, LO2-5] The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the fixed and variable 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 Overhead Machine- Overhead Machine- Hours Hours Costs $84,000 $99,000 $89,500 $90,000 $81,500 $75,500 $70,500 $64,500 $69,000 $75,000 $71,500 $78,000 21,000 24,000 23,000 22,000 20,000 18,000 12,000 13,000 15,000 17,000 15,000 18,000 $86,000 $93,000 $93,000 $87,000 $80,000 $76,500 $67,500 $71,000 $73,500 $72,500 $71,000 $75,000 21,000 25,000 22,000 23,000 20,500 9,000 January February . June . August . September .. 10,000 12,000 17,000 16,000 19,000 .. November December.Explanation / Answer
Part-3) The least-squares model uses all of the data for the seperation of a mixed cost into its fixed and variable components. Afterwards making a comparison to the high-low method which only uses 2 points this analysis gives more accuracy.
Total fixed costs equals $40,102
Variable costs equals $ 2.13 per machine-hour
X = variable machine hour
Equation will be Y=a + b(x)
This gives , Y=$40,102 + $2.13(x)
Part-4) Relevant range of activity = 25,000+20,000 = 45,000/2 = 22,500
Assuming 25,000 machine hours are consumed, the cost equals $99,000
Assuming 20,000 machine hours are consumed, the cost equals $80,000
Variable cost= ($99,000-$80,000) / (25,000-20,000) =$19,000/5,000 = $3.80 per machine hour
Fixed cost element =$4,000 (=$99,000-($3.80*25,000) )
Assuming that 22,500 machine-hours are consumed during a month then the:
Variable cost =$85,500 (=22,500*$3.80)
Total overhead cost =$89,500 (=$85,500+$4,000)
Part-5) The estimate of the least square regression exceeds the high-low estimate of the fixed cost. However the high-low estimate of the variable cost is actually the opposite. According to me the accuracy of the least square regression reflects more accuracy because it uses more data points as opposed to the high- low method.