Estimate the total overhead cost that would be incurred

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Reference no: EM131969145

Problem

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:

The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 18,500 machine-hours. If the machine-hours used exceeds 18,500, then the fee becomes strictly variable with respect to the total number of machine-hours consumed during the month. Lease expense is a major element of overhead cost.

	Last Year			This Year
Month	Machine- Hours	Overhead Costs		Machine- Hours	Overhead Costs
January	22,100	$	89,500	22,100	$	91,500
February	26,000	$	110,000	25,000	$	104,000
March	23,000	$	90,600	24,000	$	94,100
April	24,000	$	91,100	23,000	$	88,100
May	21,500	$	82,600	18,775	$	81,100
June	18,000	$	81,000	17,000	$	82,000
July	15,100	$	76,000	13,100	$	73,000
August	10,000	$	70,000	14,100	$	76,500
September	15,000	$	74,500	16,100	$	79,000
October	18,100	$	80,500	18,100	$	78,000
November	17,100	$	77,000	16,100	$	76,500
December	17,500	$	83,500	17,000	$	80,500

1. Assume that the company consumes 23,600 machine-hours during a month. Using the high-low method, estimate the total overhead cost that would be incurred at this level of activity. Be sure to consider only the data points contained in the relevant range of activity when performing your computations.

Reference no: EM131969145

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