Your company is preparing an estimate of its production costs for the coming period. The controller estimates that direct materials costs are$45 per unit and that direct labor costs are$21 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult. The controller's office estimated overhead costs at $3,600 for fixed costs and $18 per unit for variable costs. Your colleague, Lance, who graduated from a rival school, has already done the analysis and reports the "correct" cost equation as follows: Overhead cost = $10,600 + $16.05 per unit Lance also reports that the correlation coefficient for the regression is .82 and says, "With 82 percent of the variation in overhead explained by the equation, it certainly should be adopted as the best basisfer estimating costs." When asked for the data used to generate the regression, Lance produces the following: Month Overhead Unit Production $57,144 60,756 77,040 56,412 81,396 72,252 63,852 73,596 77,772 60,048 3,048 3,248 4,176 3,000 3,408 3,928 .......... 2 3 4 ..... .... 7 ...... .. 8. 9. 10 3,336 4,016 4,120 3,192 ..... ........ .... .. 11 12 13 61,632 73,920 73,248 3,368 4,080 3,888 The company controller is somewhat surprised that the cost estimates are so different. You have therefore been assigned to check Lance's equation. You accept the assignment with glee. Required Analyze Lance's results and state your reasons for supporting or rejecting his cost equation.
Your company is preparing an estimate of its production costs for the coming period. The controller estimates that direct materials costs are$45 per unit and that direct labor costs are$21 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult. The controller's office estimated overhead costs at $3,600 for fixed costs and $18 per unit for variable costs. Your colleague, Lance, who graduated from a rival school, has already done the analysis and reports the "correct" cost equation as follows: Overhead cost = $10,600 + $16.05 per unit Lance also reports that the correlation coefficient for the regression is .82 and says, "With 82 percent of the variation in overhead explained by the equation, it certainly should be adopted as the best basisfer estimating costs." When asked for the data used to generate the regression, Lance produces the following: Month Overhead Unit Production $57,144 60,756 77,040 56,412 81,396 72,252 63,852 73,596 77,772 60,048 3,048 3,248 4,176 3,000 3,408 3,928 .......... 2 3 4 ..... .... 7 ...... .. 8. 9. 10 3,336 4,016 4,120 3,192 ..... ........ .... .. 11 12 13 61,632 73,920 73,248 3,368 4,080 3,888 The company controller is somewhat surprised that the cost estimates are so different. You have therefore been assigned to check Lance's equation. You accept the assignment with glee. Required Analyze Lance's results and state your reasons for supporting or rejecting his cost equation.
Chapter19: Pricing Concepts
Section: Chapter Questions
Problem 6DRQ
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Transcribed Image Text:Your company is preparing an estimate of its production costs for the coming period. The controller
estimates that direct materials costs are$45 per unit and that direct labor costs are$21 per hour.
Estimating overhead, which is applied on the basis of direct labor costs, is difficult.
The controller's office estimated overhead costs at $3,600 for fixed costs and $18 per unit for variable
costs. Your colleague, Lance, who graduated from a rival school, has already done the analysis and reports
the "correct" cost equation as follows:
Overhead cost = $10,600 + $16.05 per unit
Lance also reports that the correlation coefficient for the regression is .82 and says, "With 82 percent of
the variation in overhead explained by the equation, it certainly should be adopted as the best basistot
estimating costs."
When asked for the data used to generate the regression, Lance produces the following:
Month
Overhead
Unit Production
$57,144
60,756
77,040
3,048
3,248
4,176
3
4.
56,412
81,396
72,252
63,852
73,596
77,772
60,048
61,632
73,920
73,248
3,000
3,408
3,928
3,336
4,016
4,120
3,192
3,368
4,080
3,888
7
8.
9.
10
11
12
13
The company controller is somewhat surprised that the cost estimates are so different. You have
therefore been assigned to check Lance's equation. You accept the assignment with glee.
Required
Analyze Lance's results and state your reasons for supporting or rejecting his cost equation.
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