Chapter 10, Problem 10.44P

Cost estimation. Hankuk Electronics started production on a sophisticated new smartphone running the Android operating system in January 2017. Given the razor-thin margins in the consumer electronics industry, Hankuk’s success depends heavily on being able to produce the phone as economically as possible. At the end of the first year of production, Hankuk’s controller, Inbee Kim, gathered data on its monthly levels of output, as well as monthly consumption of direct labor-hours (DLH). Inbee views labor-hours as the key driver of Hankuk’s direct and overhead costs. The information collected by Inbee is provided below:

1. 1. Inbee is keen to examine the relationship between direct labor consumption and output levels. She decides to estimate this relationship using a simple linear regression based on the monthly data. Verify that the following is the result obtained by Inbee:

     Required

Regression 1: Direct labor-hours = a + (b × Output units)

1. 2. Plot the data and regression line for the above estimation. Evaluate the regression using the criteria of economic plausibility, goodness of fit, and slope of the regression line.
2. 3. Inbee estimates that Hankuk has a variable cost of $17.50 per direct labor-hour. She expects that Hankuk will produce 650 units in the next month, January 2018. What should she budget as the expected variable cost? How confident is she of her estimate?