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.