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Problem 5 (Linear Cost Approximation) Tita Lopez, managing director of the ABS Consulting Group, is examining how overhead costs behave with variations in monthly professional labor- hours billed to clients. Assume the following historical data: Total Overhead Costs P340,000 400,000 435.000 477,000 529.000 587.000 Professional Labor-Hours Billed to Clients 3,000 4,000 5,000 6.000 7,000 8,000 Required: 1. Compute the linear cost function, relating total overhead cost to professional labor-hours, using` the representative observations of 4,000 and 7,000 hours. Plot the linear cost function. component of the cost function represent the fixed overhead costs of the - ABS Consulting Group? Why? Does the constant 2. What wouid be the predicted total overhead costs for (a) 5,000 hours, and (b) 8,000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours. 3. Lopez had a chance to accept a special job that would have boosted professional labor-hours from 4,000 to 5,000 hours. Suppose Lopez, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of P38,000, before deducting the predicted increase in total overhead cost, P43,000. What is the total contribution margin actually forgone?

Problem 5 (Linear Cost Approximation) Tita Lopez, managing director of the ABS Consulting Group, is examining how overhead costs behave with variations in monthly professional labor- hours billed to clients. Assume the following historical data: Total Overhead Costs P340,000 400,000 435.000 477,000 529.000 587.000 Professional Labor-Hours Billed to Clients 3,000 4,000 5,000 6.000 7,000 8,000 Required: 1. Compute the linear cost function, relating total overhead cost to professional labor-hours, using` the representative observations of 4,000 and 7,000 hours. Plot the linear cost function. component of the cost function represent the fixed overhead costs of the - ABS Consulting Group? Why? Does the constant 2. What wouid be the predicted total overhead costs for (a) 5,000 hours, and (b) 8,000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours. 3. Lopez had a chance to accept a special job that would have boosted professional labor-hours from 4,000 to 5,000 hours. Suppose Lopez, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of P38,000, before deducting the predicted increase in total overhead cost, P43,000. What is the total contribution margin actually forgone?

Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter3: Cost Behavior And Cost Forecasting
Section: Chapter Questions
Problem 19BEA: Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period That...
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Problem 5 (Linear Cost Approximation) Tita Lopez, managing director of the ABS Consulting Group, is examining how overhead costs behave with variations in monthly professional labor- hours billed to clients. Assume the following historical data: Professional Labor-Hours Billed to Clients Total Overhead Costs P340,000 400.000 435,000 477,000 529.000 587.000 3,000 4,000 5,000 6.000 7,000 8.000 Required: 1. Compute the linear cost function, relating total overhead cost to professional labor-hours, using the representative observations of 4,000 and 7,000 hours. component of the cost function represent the fixed overhead costs of the ABS Consulting Group? Why? Plot the linear cost function. Does the constant What wouid be the predicted total overhead costs for (a) 5,000 hours, and (b) 8.000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours. 3. Lopez had a chance to accept a special job that would have boosted professional labor-hours from 4,000 to 5,000 hours. Suppose Lopez, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of P38,000, before deducting the predicted increase in total overhead cost, P43,000. What is the total contribution margin actually forgone? 2.
Transcribed Image Text:Problem 5 (Linear Cost Approximation) Tita Lopez, managing director of the ABS Consulting Group, is examining how overhead costs behave with variations in monthly professional labor- hours billed to clients. Assume the following historical data: Professional Labor-Hours Billed to Clients Total Overhead Costs P340,000 400.000 435,000 477,000 529.000 587.000 3,000 4,000 5,000 6.000 7,000 8.000 Required: 1. Compute the linear cost function, relating total overhead cost to professional labor-hours, using the representative observations of 4,000 and 7,000 hours. component of the cost function represent the fixed overhead costs of the ABS Consulting Group? Why? Plot the linear cost function. Does the constant What wouid be the predicted total overhead costs for (a) 5,000 hours, and (b) 8.000 hours using the cost function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours. 3. Lopez had a chance to accept a special job that would have boosted professional labor-hours from 4,000 to 5,000 hours. Suppose Lopez, guided by the linear cost function, rejected this job because it would have brought a total increase in contribution margin of P38,000, before deducting the predicted increase in total overhead cost, P43,000. What is the total contribution margin actually forgone? 2.
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