High-Low Method, Scattergraph
Academy Products manufactures a variety of custom components for use in aircraft navigation and communications systems. The controller has asked for your help in estimating fixed and variable overhead costs for Academy's Rio Puerco plant. The controller tells you that the best cost driver for estimating overhead is machine-hours. Monthly data on machine-hours and overhead costs for the last year have been collected and are shown below:
|
Month
|
Machine-Hours
|
Overhead Costs
|
|
1
|
630,000
|
$ 660,000
|
|
2
|
900,000
|
2,170,000
|
|
3
|
765,000
|
1,220,000
|
|
4
|
665,000
|
780,000
|
|
5
|
1,035,000
|
3,700,000
|
|
6
|
800,000
|
1,400,000
|
|
7
|
750,000
|
1,100,000
|
|
8
|
815,000
|
1,500,000
|
|
9
|
935,000
|
2,500,000
|
|
10
|
680,000
|
840,000
|
|
11
|
715,000
|
980,000
|
|
12
|
700,000
|
910,000
|
Required
a. Estimate the monthly fixed costs and the unit variable cost per machine-hour using the highlow estimation method.
b. Draw a scattergraph relating overhead costs to the number of machine-hours.
c. Considering your scattergraph, how much confi dence do you have in your estimate from requirement (a)?