## MBA iQ Lesson: August 4, 2021

Aug 4th 2021

Here is our latest lesson to boost your MBA iQ? Our lessons feature topics that preview what you can expect in your typical MBA course.

MBA iQ Lesson

Use the following information to answer the following two questions:

XYR Company derived the following cost relationship from a regression analysis of its monthly manufacturing overhead cost.

C = \$80,000 + \$12 M

where C is monthly manufacturing overhead cost and M is machine hours. The standard error of estimate of the regression is \$6,000. The standard time required to manufacture a case of the company’s single product is four machine hours. XYR applies manufacturing overhead to pro­duction on the basis of machine hours, and its normal annual production is 50,000 cases.

What is the estimated variable manufacturing overhead cost for the XYR Company for a month in which scheduled production is 5,000 cases?

a. \$200,000

b. \$210,000

c. \$220,000

d. \$240,000

Choice (d) is the correct answer. In the cost equation C = \$80,000 + \$12 M, where \$80,000 is the fixed cost component and \$12M is the variable cost component. That is, \$12 x 5,000 cases x 4 machine hours per case = \$240,000. Choice (a) is incorrect because it multiplies 50,000 with 4, resulting in \$200,000. The numbers in the other choices are based on averages.

What is the predetermined fixed manufacturing overhead rate for the XYR Company?

a. \$1.60

b. \$1.72

c. \$4.80

d. \$6.40

Choice (c) is the correct answer. Since \$80,000 is the fixed component per month, we need to multiply this by 12 to obtain annual fixed cost. The predetermined overhead rate per machine hour is (\$80,000 x 12)/(50,000 x 4) = \$960,000/200,000 = \$4.80. Choice (a) is incorrect because it divides the \$80,000 by 50,000 cases, giving \$1.60. Choice (b) is incorrect because it divides the (\$80,000 +6,000) by 50,000 cases, giving \$1.72. Choice (d) is incorrect because it divides the (\$80,000 x 4) by 50,000 cases, giving \$6.40.