Question

PART ONE

Home Remodeling Inc. recently obtained a short-term bank loan from City National Bank. The bank required that certain credit information and pro forma financial statements be maintained through the life of the loan. In order to prepare the pro forma statements, Home Remodeling must forecast total overhead cost. The actual machine hours and overhead cost are presented below for the past six months.

Month	Overhead Cost			Machine Hours
January	$	3,185			1,274
February		3,484			1,394
March		2,996			1,150
April		3,210			1,235
May		3,315			1,230
June		3,440			1,300

Using the high-low method, unit variable overhead cost is calculated to be:

• $2.00.

• $2.49.

• $3.40.

• $2.60.

• $2.06.

PART TWO:

Armer Company is accumulating data to use in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested the use of linear regression to derive an equation for maintenance hours and costs. Data regarding the maintenance hours and costs for the last year and the results of the regression analysis follow:

Month	Maintenance Cost			Machine Hours
Jan.	$	4,200			480
Feb.		3,000			320
Mar.		3,600			400
Apr.		2,820			300
May		4,350			500
June		2,960			310
July		3,030			320
Aug.		4,470			520
Sept.		4,260			490
Oct.		4,050			470
Nov.		3,300			350
Dec.		3,160			340
Sum	$	43,200			4,800
Average	$	3,600		$	400
Average cost per hour				$	9.00
a (intercept)				$	684.65
b (coefficient)					7.2884
Standard error of the estimate					34.469
R-squared					0.99724
t-value for b					60.105

If Armer Company uses the high-low method of analysis, the equation for the relationship between hours of activity and maintenance cost follows:

• y = 570 + 9.0x

• y = 400 + 9.0x

• None of these answer choices are correct.

• y = 3,600 + 400x

• y = 570 + 7.5x

Answer 1

Part 1
	Machine Hours	Overhead cost
High level of activity	1,394	$3,484
Low level of activity	1,150	$2,996
Change	244	$488
Variable Overhead Cost per machine hrs =$488 / 244 hours =$2.00 per machine hours
Fixed cost element =$3,485 - (1,394*$2.00) =$697
Fixed cost element =$697
Part 2
	Machine Hours	Maintainance cost
High level of activity	520	$4,470
Low level of activity	300	$2,820
Change	220	$1,650
Variable Maintainance Cost per machine hrs =$1650 / 220 hours =$7.50 per machine hours
Fixed cost element =$4,470 - (520*$7.50) =$570
Fixed cost element =570
Cost equation is:Y =$570 + $7.50X