Expert Solutions

Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, Kansas. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected:
Total Overhead                                 Costs         January                              3,800                  4,520,000                       $138,000 February                             3,650                  4,340,000                        136,800 March                                3,900                   4,500,000                       139,200 April                                  3,300                   4,290,000                       136,800 May                                  3,250                   4,200,000                       126,000 June                                 3,100                   4,120,000                       120,000
Question 1: Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
Question 2: Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
Question 3:  For July, the company ran the machines for 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July?

Problem 2 Louder Company manufactures part MNO used in several of its truck models. 10,000 units are produced each year with production costs as follows:
Direct materials                                 $ 45,000
Direct manufacturing labor                     15,000
Variable support costs                          35,000
Fixed support costs                              25,000
Total costs                                      $120,000

Louder Company has the option of purchasing part MNO from an outside supplier at $11.20 per unit. If MNO is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.

Question 1:  What amount of the MNO production costs is avoidable?
Question 2:  Should the company outsource MNO? Why or why not?
Question 3: What other items should the company consider before outsourcing any of the parts it currently manufactures?