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# Using Excel develop three scatter diagrams showing overhead costs against each of the proposed independent variables. Comment on whether these scatter diagrams indicate that linearity is a reasonable assumption for each

The CEO of Milton Manufacturing Company has asked you to develop a cost equation to predict monthly overhead costs in its production department. You have collected the following data for the last 10 months: Overhead costs (OH\$) and the proposed independent variables: Number of machine hours worked (MH), number of direct labour hours (DLH) and number of indirect labour workers (IL Workers).

OH (\$) MH DLH IL Workers
2,000 9,500 1,800 3
4,500 20,000 4,200 8
3,000 14,000 2,500 15
2,700 13,000 2,400 10
6,000 28,000 5,000 16
5,100 25,000 4,800 12
8,000 42,000 8,100 6
4,800 25,000 4,500 8
7,500 35,000 6,900 14
6,500 32,000 6,000 11

(a) The CEO suggests that he has heard that the high-low method of estimating costs works
fairly well and should be inexpensive to use. Write a response to this suggestion for the CEO indicating the advantages and disadvantages, including the calculation of a cost equation for this data using MH as the cost driver. (5 marks)

(b) Using Excel develop three scatter diagrams showing overhead costs against each of the proposed independent variables. Comment on whether these scatter diagrams indicate that linearity is a reasonable assumption for each. (5 marks)

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