Coral, Inc. manufactures a variety of products. The following data pertains to its plant in Chennai, India, which is relatively new and manufactures auto parts. Management wants to better understand the behaviour of overhead costs in order to better estimate and manage these costs. Management believes that direct labour-hours are a good driver of overhead costs; moreover labour hours-data is readily available. Historical data for the past two years is available and is as follows:
All equipment in the Chennai plant is leased under an arrangement calling for a flat fee up to 70,000 direct labour-hours of activity in the plant, after which lease charges are assessed on an hourly basis. Lease expense is a major item of overhead cost.
Required:
Complete requirements 1 and 2 using data for each year as well as the full two-year period.
1. Using the high–low method, estimate the cost formula for overhead in the Chennai plant.
2. Using the least-squares regression method, estimate the cost formula for overhead in the Chennai plant.
3. Assume that the Chennai plant works 78,750 and 54,500 direct labour-hours respectively during two different months. Compute the expected overhead cost for the month using the cost formulas developed for the two-year period with
a. The high–low method.
b. The regression method.
4. Of the two proposed methods, which one should Coral, Inc. use to estimate monthly overhead costs in the Chennai plant? Explain fully, indicating the reasons why the other method is less desirable.
5. How is the concept of relevant range applicable to the Chennai plant?
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