Tessmer Manufacturing Company Produces Inventory in a Highly Automated Assembly

question 38

Essay

Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe,Kansas.The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes.For the first six months of operations,the following data were collected:
$\begin{array}{lrrr}&\text { Machine-hours}&\text { Kilowatt-hours }&\text {Total Overhead Costs }\\\text { January } & 4,560 & 5,424,000 & \$ 405,600 \\\text { February } & 4,380 & 5,208,000 & 404,160 \\\text { March } & 4,680 & 5,400,000 & 407,040 \\\text { April } & 3,960 & 5,148,000 & 404,160 \\\text { May } & 3,900 & 5,040,000 & 391,200 \\\text { June } & 3,720 & 4,944,000 & 384,000\end{array}$ Required:
a.Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b.Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
c.For July,the company ran the machines for 4,000 hours and used 4,550,000 kilowatt-hours of power.The overhead costs totaled $365,000.Which cost driver was the best predictor for July?

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Definitions:

Market Price

The amount of money a buyer pays and a seller receives for a product or service in a competitive marketplace.

Producer Surplus

The difference between the amount a producer is paid for a good compared to the minimum amount they would be willing to accept, representing profit.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and the actual amount they receive due to higher market price.

Binding Price Ceiling

A government-imposed limit on the price of a product or service that is set below the market equilibrium, leading to shortages and a decrease in supply.