1. a. What is the average cost of manufacturing a drink bottle in 2017? How does it compare to Kraff's Required offer? b. Can Relling use the answer in requirement la to determine the cost of manufacturing 225,000 drink bottles? Explain. 2. Relling's cost analyst uses annual data from past years to estimate the following regression equation with total manufacturing costs of the drink bottle as the dependent variable and drink bottles produced as the independent variable: y = $445,000 + $1.75X During the years used to estimate the regression equation, the production of bottles varied from 200,000 to 235,000. Using this equation, estimate how much it would cost Relling to manufacture 225,000 drink bottles. How much more or less costly is it to manufacture the bottles than to acquire them from Kraff? 3. What other information would you need to be confident that the equation in requirement 2 accurately predicts the cost of manufacturing drink bottles?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Cost-volume-profit and regression analysis. Relling Corporation manufactures a drink bottle, model CL24. During 2017, Relling produced 210,000 bottles at a total cost of $808,500. Kraff Corporation has offered to supply as many bottles as Relling wants at a cost of $3.75 per bottle. Relling anticipates needing 225,000 bottles each year for the next few years.
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