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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 $23 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult. The controller's office estimated overhead costs at $4,000 for fixed costs and $17 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 = $10,511 + $15.94 per unit Lance also reports that the correlation coefficient for the regression is 0.81 and says, "With 81% of the variation in overhead explained by the equation, it certainly should be adopted as the best basis for estimating costs." When asked for the data used to generate the regression, Lance produces the following:

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 $23 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult. The controller's office estimated overhead costs at $4,000 for fixed costs and $17 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 = $10,511 + $15.94 per unit Lance also reports that the correlation coefficient for the regression is 0.81 and says, "With 81% of the variation in overhead explained by the equation, it certainly should be adopted as the best basis for estimating costs." When asked for the data used to generate the regression, Lance produces the following:

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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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 $23 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult. The controller's office estimated overhead costs at $4,000 for fixed costs and $17 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 = $10,511 + $15.94 per unit Lance also reports that the correlation coefficient for the regression is 0.81 and says, "With 81% of the variation in overhead explained by the equation, it certainly should be adopted as the best basis for estimating costs." When asked for the data used to generate the regression, Lance produces the following: Month LEMASTOSOHN3 1 2 4 5 6 7 8 9 10 11 12 13 Overhead Unit Production $57,064 60,683 77,008 56,624 81,700 72,473 63,904 73,523 77,597 60,068 61,701 73,878 73,513 3,070 3,280 4,210 3,040 3,440 3,950 3,370 4,050 4,160 3,230 3,400 4, 120 3,920 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.
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 $23 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult. The controller's office estimated overhead costs at $4,000 for fixed costs and $17 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 = $10,511 + $15.94 per unit Lance also reports that the correlation coefficient for the regression is 0.81 and says, "With 81% of the variation in overhead explained by the equation, it certainly should be adopted as the best basis for estimating costs." When asked for the data used to generate the regression, Lance produces the following: Month LEMASTOSOHN3 1 2 4 5 6 7 8 9 10 11 12 13 Overhead Unit Production $57,064 60,683 77,008 56,624 81,700 72,473 63,904 73,523 77,597 60,068 61,701 73,878 73,513 3,070 3,280 4,210 3,040 3,440 3,950 3,370 4,050 4,160 3,230 3,400 4, 120 3,920 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.
Removing any outliers identified in the scattergraph, use Excel to perform a new regression analysis. (Round "Intercept" value to 5 decimal places and "Unit Production" to 7 decimal places.) Coefficients Intercept Unit production What is the cost equation with the new results? (Round variable costs per unit to 2 decimal places.) Overhead cost Units.
Transcribed Image Text:Removing any outliers identified in the scattergraph, use Excel to perform a new regression analysis. (Round "Intercept" value to 5 decimal places and "Unit Production" to 7 decimal places.) Coefficients Intercept Unit production What is the cost equation with the new results? (Round variable costs per unit to 2 decimal places.) Overhead cost Units.
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