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.

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.

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)


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