Bailey Jones owns a catering company that stages banquets and parties for both individuals and companies. The business is seasonal, with heavy demand during the summer months and year-end holidays and light demand at other times. Bailey has gathered the following cost information from the past year:
| Month | Labor Hours | Overhead Costs | |
| January | 2,500 | $ 57,000 |
| February | 2,800 | 59,000 |
| March | 3,000 | 60,000 |
| April | 4,200 | 64,000 |
| May | 4,500 | 67,000 |
| June | 5,500 | 71,000 |
| July | 6,500 | 74,000 |
| August | 7,500 | 77,000 |
| September | 7,000 | 75,000 |
| October | 4,500 | 68,000 |
| November | 3,100 | 62,000 |
| December | 6,500 | 73,000 |
| Total | 57,600 | $807,000 |
Required:
a.
Using the high-low method, compute the overhead cost per labor hour and the fixed
overhead cost per month.
b.
Bailey has booked 2,800 labor hours for the coming month. How much overhead
should he expect to incur?
c.
If Bailey books one more catering job for the month, requiring 200 labor hours,
how much additional overhead should he expect to incur?
d.
Bailey recently attended a meeting of the local Chamber of Commerce, at which
he heard an accounting professor discuss regression analysis and its business
applications. After the meeting, Bailey enlisted the professor's assistance in
preparing a regression analysis of the overhead data he collected. This analysis
yielded an estimated fixed cost of $48,000 per month and a variable cost of
$4 per labor hour. Why do these estimates differ from your high-low estimates,
calculated in part (a)?
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