Question

Northern Lights Company manufacture recreated painting products in a highly automated assembly plant in Yukon, North West Territories. Their automated system is in its first year of operation, and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations the following data were collected:

Observation	Machine-hours	Kilowatt-hours	Total Overhead Costs
January	1,950	2,260,000	116,000
February	1,825	2,170,000	114,000
March	1,900	2,250,000	115,000
April	1,650	2,145,000	114,000
May	1,625	2,100,000	105,000
June	1,550	2,060,000	100,000

Required:

1) Compute a cost estimating equation for each independent variable (machine-hours and kilowatt-hours) using the high-low method.

2) For July the company ran the machines for 1,600 hours and used 2,075,000 kilowatt hours of power. The overhead costs totaled $95,000. Which driver was the best predictor for July?

Answer 1