Question

Home Remodeling Inc. recently obtained a short-term bank loan from City National Bank. The bank required that certain credit information and pro forma financial statements be maintained through the life of the loan. In order to prepare the pro forma statements, Home Remodeling must forecast total overhead cost. The actual machine hours and overhead cost are presented below for the past six months. Month Overhead Cost Machine Hours January $ 3,320 1,340 February 3,620 1,460 March 3,056 1,220 April 3,350 1,300 May 3,450 1,300 June 3,580 1,370 Using the high-low method, unit variable overhead cost is calculated to be:

Answer 1

Home Remodeling Inc.

Using the high-low method, the unit variable overhead cost is calculated to be:

= $2.35 per machine hour.

Step-by-step explanation:

a) Data and Calculations:

Month Overhead Cost Machine Hours

January $ 3,320 1,340

February 3,620 1,460

March 3,056 1,220

April 3,350 1,300

May 3,450 1,300

June 3,580 1,370

Highest = February $3,620 1,460

Lowest = March $3,056 1,220

Difference = $ 564 240

Variable cost = $564/240 = $2.35

Using the February data, the fixed cost:

Variable cost = $2.35 * 1,460 = $3,431

Fixed cost = $3,620 - $3,431 = $189