90.2K

Verified Solution

Link Copied!

Kenya Bike Limited (KBL) assembles motor bikes using spare parts procured from China. The following data relates to the costs and number of motor bikes assembled in 2015/16 financial year.

Month	Total overheads	Number of bikes assembled	Number of hours taken to assemble the bikes
July	460,000	300	900
August	120,000	220	660
September	480,000	330	990
October	550,000	390	1170
November	570,000	410	1230
December	310,000	240	720
January	440,000	290	870
February	455,000	320	960
March	530,000	380	1140
April	250,000	150	450
May	700,000	450	1350
June	490,000	350	1050

1. Using the conventional high low cost estimation exercise, determine the cost prediction equation for the company using the number of motor bikes assembled as the independent variable

2. One of the cost elements included in the total overheads in the table above is supervision costs. When the number of hours taken to assemble the motor bikes exceeds 1000, KBL is forced to hire an additional supervisor hence fixed costs increase by 10% (a step of 10% is noted if more than 1000 hours are used). The variable cost of assembling a motor bike is however not affected by the change in the number of hours. Using the high low method of cost estimation with the number of hours taken to assemble the motor bikes as the independent variable, determine:

• The equation to use to predict costs when the number of hours taken to assemble the motor bikes are less than 1000;
• The equation to use to predict costs when the number of hours taken to assemble the motor bikes are more than 1000;

State two limitations of the high low method of cost estimation and for each limitation suggest the steps that as a manager you can take to overcome it.

Answer & Explanation Solved by verified expert

See Answer