Small Case analysis

Outside Environment, Inc. provides commercial landscaping services in San Diego. Sasha Cairns, the

firm’s owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing

the firm’s costs, Cairns has developed the following preliminary cost estimates for each 1,000 square

feet of landscaping.

Cairns is quite certain about the estimates for direct material and direct labor. However, she is not as

comfortable with the overhead estimate. The estimate for overhead is based on the overhead costs that

were incurred during the past 12 months as presented in the following schedule. The estimate of $18

per direct-labor hour was determined by dividing the total overhead costs for the 12-month period

($1,296,000) by the total direct-labor hours (72,000).

Cairns believes that overhead is affected by total monthly direct-labor hours. Cairns decided to perform

a least-squares regression of overhead (OH) on total direct-labor hours (DLH).

Required:

1. Develop cost formula for overhead cost using least square regression method by constructing

excel spreadsheet.

2. The overhead rate developed from the least-squares regression is different from Cairns’

preliminary estimate of $18 per direct-labor hour. Explain the difference in the two overhead

rates.

3. Using the overhead formula that was derived from the least-squares regression, determine a

total variable-cost estimate for each 1,000 square feet of landscaping.

4. Cairns has been asked to submit a bid on a landscaping project for the city government

consisting of 50,000 square feet. Cairns estimates that 30 percent of the direct-labor hours

required for the project will be on overtime. Calculate the incremental costs that should be

included in any bid that Cairns would submit on this project. Us