Question

The Feline Company has been having some difficulties estimating its manufacturing overhead costs. In the past, manufacturing overhead costs have been related to production levels. However, some production managers have indicated that the size of their production lots might also be having an impact on the amount of their monthly manufacturing overhead costs. In order to investigate this possibility, the company collected information on its monthly manufacturing overhead costs, production in units, and average production lot size for 2016.

Month	Production (Units)				Manufacturing Overhead Cost				Average Monthly Production Lot Size
1		75,000			$	925,800			20
2		90,000				843,875			19
3		65,000				910,125			24
4		80,000				946,000			19
5		55,000				879,000			24
6		50,000				825,000			18
7		85,000				960,000			22
8		105,000				1,053,500			25
9		102,000				1,020,000			23
10		68,000				905,000			20
11		75,000				938,000			22
12		95,000				995,000			24

Required:

(a.) Use the high-low method to estimate next month's manufacturing overhead costs, assuming the company is planning to produce 92,000 units.
(b.) Use the high-low method to estimate next month's manufacturing overhead costs, assuming the company is planning to run a 21-lot size.

Answer 1

a

Particulars	Units	Amount
At high point	105,000	1,053,500
At low point	50,000	825,000
Difference	55,000	228,500
Variable amount per unit	4.154545455
Total cost at high point	1,053,500.00
Variable portion	436,227.27
Fixed amount	617,272.73
At required level:
Required units	92,000
Variable cost	382,218.18
Fixed cost	617,272.73
Total cost	999,490.91

b

Particulars	Units	Amount
At high point	25	1,053,500
At low point	18	825,000
Difference	7	228,500
Variable amount per unit	32,642.86
Total cost at high point	1,053,500
Variable portion	816,071.43
Fixed amount	237,428.57
At required level:
Required units	21
Variable cost	685,500.00
Fixed cost	237,428.57
Total cost	922,928.57