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Case 2-26 Mixed Cost Analysis and the Relevant Range [LO2-4, 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
Month	Machine- Hours	Overhead Costs			Machine- Hours	Overhead Costs
January	22,900	$	87,500		22,900	$	89,500
February	28,400	$	118,000		27,400	$	112,000
March	25,400	$	91,400		26,400	$	94,900
April	26,400	$	91,900		25,400	$	88,900
May	23,900	$	83,400		19,375	$	81,900
June	18,800	$	85,000		17,800	$	86,000
July	15,900	$	80,000		13,900	$	77,000
August	10,800	$	74,000		14,900	$	75,000
September	19,000	$	78,500		16,900	$	83,000
October	18,900	$	84,500		17,000	$	82,000
November	17,900	$	81,000		16,900	$	80,500
December	18,000	$	87,500		17,800	$	84,500

The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 19,000 machine-hours. If the machine-hours used exceeds 19,000, 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.

Required:

1.	Using the high-low method, estimate a manufacturing overhead cost formula based on the data given above for last year and this year. (Do not round your intermediate calculations. Round the Variable cost per DLH to 2 decimal places.)

4.	Assume that the company consumes 24,400 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. (Do not round intermediate calculations.)

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