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 result and state your reason for supporting or rejecting his cost equation.
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 result and state your reason for supporting or rejecting his cost equation.
Chapter19: Pricing Concepts
Section: Chapter Questions
Problem 6DRQ
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| Your company is preparing an estimate of its production cost for the coming period. | |||
| The controller estimates that | |||
| direct material | $ 45,00 | per unit | |
| direct labor | $ 21,00 | per hour |
| estimating overhead, which is applied on the basis of direct labor cost, is difficult | |||
| The controller's office estimated : | |||
| over head cost | $ 3.600,00 for fixed cost | ||
| $ 18,00 for variable cost | |||
| Your colleague, Lance who graduated from a rival school, has already done the analysis | |||
| and reports the correct cost equatioin as follows: | |||
| over head cost | $ 10.600,00 | ||
| $ 16,05 per unit | |||
| Lance also reports that the correlation coefficient for the regression is 0,82 and says | |||
| "with 82 percent of the variation in overhead explained by the equation, it certainly | |||
| should be adopted as the best basis for estimating cost" | |||
| When asked for the data used to generate the regression, Lance produces the following: | |||
| Month | Overhead | Unit Production | |
| 1 | $ 57.144 | 3.048 | |
| 2 | $ 60.756 | 3.248 | |
| 3 | $ 77.040 | 4.176 | |
| 4 | $ 56.412 | 3.000 | |
| 5 | $ 81.396 | 3.408 | |
| 6 | $ 72.252 | 3.928 | |
| 7 | $ 63.852 | 3.336 | |
| 8 | $ 73.596 | 4.016 | |
| 9 | $ 77.772 | 4.120 | |
| 10 | $ 60.048 | 3.192 | |
| 11 | $ 61.632 | 3.368 | |
| 12 | $ 73.920 | 4.080 | |
| 13 | $ 73.248 | 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 result and state your reason for supporting or rejecting his cost equation. | |||
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