Business Problem (Tessmer Manufacturing Company and Louder Company manufactures )

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

 

Required:

  

  1. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
  2.  Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
  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?                                                                                                                                                                                                                                                                                                                                                                                                                                             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. 
  4.  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? 
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