Tessmer Manufacturing & Louder Company

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:

Observation      Machine-hours            Kilowatt-hours             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



  1. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.

b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.

c. 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?

2 – Louder Company manufactures part MNO used in several of its truck models.  A total of 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? (five points)

Question 2:  Should the company outsource MNO?  Why or why not?  (five points)

Question 3: What other items should the company consider before outsourcing any of the parts it manufactures?  (five points)