This exam is worth 80 points. The first three items have four parts. Each part is worth six points. The final two items are worth three points each. (Two points are free.)
The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. They have debated whether the power cost should be treated as fixed, variable, or both. Using the following data you are charged to settle this issue and determine the best cost formula for Wheeler.
Quarter Machine Hrs. Power Cost
1 20000 26000
2 25000 38000
3 30000 42500
4 22000 37000
5 21000 34000
6 18000 29000
7 24000 36000
8 28000 40000
Find the estimated fixed cost associated with the machine hours.
Find the estimated variable cost associated with the machine hours.
Discuss your confidence in the use of these estimates.
Would you recommend using this cost function? Explain.