The Lawn Company provides commercial landscaping services in San Diego. The firm’s owner wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm’s costs, she has developed the following preliminary cost estimates for each 1000 square feet of landscaping: Direct Materials $390 Direct Labor (5 hours at $11 per hour) $ 55 Overhead ($18 per direct labor hour) $ 90 Total cost per 1000 square feet $535 She is quite certain about the estimates for direct materials and for labor. However she is not as comfortable with the overhead estimate. The estimate of $18 per direct labor hour was determined by dividing the total overhead for the 12 month period ($1,296,000) by the total direct labor hours (72,000). She calculated a regression of overhead on direct labor hours, and the following cost formula for overhead was obtained: Overhead = $52,400 + $9.25 Direct Labor Hour

Questions:

1. The overhead developed from the least square regression is different from her preliminary estimate of $18 per direct labor hour. Explain the difference in the two overhead rates.

2. Prepare a bid for a 50,000 square feet project under both cost formulas. Assume that the 50,000 square foot job would require a month’s time and that the monthly fixed overhead is $4,367 ($52,400/12).

3. Which one would you recommend to be used for the project?

4. If the owner does not feel comfortable with the fixed/variable cost relationship that currently exists, could she do something about it? Come up with a managerial recommendation on how to deal with this situation?