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 2020.
 

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)

	Cost	Activity (Production in units)
Highest activity [A]	1053500	105000
Lowest activity [B]	825000	50000
Change in cost/activity [A-B]	228500	55000

Variable cost per unit = Change in cost /change in units

                         = 228500/55000

                          = $ 4.15455 per unit

	Total cost	-	Variable cost (variable cost per unit * units )	=	Fixed cost
Highest activity	1053500		4.15455*105000=436228		617272
Lowest activity	825000		4.15455*50000= 207728		617272

At 92000Units ,Total manufacturing overhead cost = [4.15455*X] + 617272

Where X= number of units to be produced

                                                                  = [4.15455*92000 ] +617272

                                                                   = 382219 +617272

                                                                   = $ 999491

Total manufacturing cost to produce 92000 units = $ 999491

b)

	Cost	Activity (Lot size)
Highest activity [A]	1053500	25
Lowest activity [B]	825000	18
Change in cost/activity [A-B]	228500	7

Variable cost per unit = Change in cost /change in lot size

                     = 228500 /7

                     = $ 32642.85714 per lot size

	Total cost	-	Variable cost (variable cost per unit * lot size )	=	Fixed cost
Highest activity	1053500		32642.85714*25 = 816071		237429
Lowest activity	825000		32642.85714 * 18= 587571		237429

At 21 Lot size ,Total manufacturing overhead cost = [32642.85714 * X] +237429

Where X= number of units to be produced

                                                                 = [32642.85714 * 21 ] + 237429

                                                                 = 685500+237429

                                                                  = $ 922929

Total manufacturing cost to produce 21 lot size = $ 922929