Labor- Overhead Month January February March April May June HoursExpenses 2,500

Question

Labor- Overhead Month January February March April May June HoursExpenses 2,500 $55,000 59,000 60,000 64,000 67,000 71,000 74,000 77,000 75,000 68,000 62,000 73,000 57.600 $805,000 2,800 3,000 4,200 4,500 5,500 6,500 7,500 7,000 4,500 3,100 6,500 August September October November December Total Overhead Costs y 3.9494x + 48126 R2 = 0.9623 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Labor Hours 1. What can you determine from this output? Select all that apply Most of the overhead cost incurred are fixed costs, Estimated Total overhead costs at 6,000 labor hours is $71,822. There is not a strong correlation between the number of labor hours and the total amount spend on overhead-only 9% of the variation in overhead costs are explained by the change in labor hours. At 15,000 hours, we could reasonably estimate total overhead costs to be $107,367 a. b. c. d.

Explanation / Answer

1.

(a)

The intercept of the line is $48,146. This is the fixed cost and incurring the maximum amount. For example, consider the maximum cost incurred in August. It was $77,000. Out of this $48,146 is the fixed cost. This is 62.5% (i.e. more than 50%). So, the claim is TRUE.

(b)

At x = 6000, y = 3.9494 x 6000 + 48146 = $71842.4. The given cost in $71822 which is different from this output (though very close). So, FLASE.

(c)

FALSE - In fact, there is a strong correlation shown by the R-square value is very high.

(d)

At x = 15,000, y = 3.9494 x 15,000 + 48146 = $107387. Again this is different from what is given (though very close). So, FLASE.

2.

At x = 5,000, y = 3.9494 x 5,000 + 48146 = $67893. So, the overhead expense will expected to be $67,893.

3.

One guest consumes 0.5 labor hours.

Cost per labor hours from the regression equation is $3.9494 (the slope of the line).

So, overhead consumed per guest = $3.9494 x 0.5 = $1.9747

4.

For the 180 guests, the total variable overhead is 180 x ($1.9747 + $20) = $3955.46

With a markup of 25%, the bid should be $3955.46 x 1.25 = $4944.3

or, on per guest basis, it is $4944.3 / 180 = $27.5 per guest.

5.

Note that the variable cost incurred is $21.9747 which is less than $25. So, bidding for $25 will still give a (25 - 21.9747)/21.9747 = 13% markup. Which may be a good option as the goal of her is to build a long-term relationship with the guests rather than earning a high-profit margin.

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