Chapter 2, Problem 2.27C

Scattergraph Analysis; Selection of an Activity Base [LO 2—5]

Angora Wraps of Pendleton, Oregon, makes fine sweaters out of pure angora wool. The business is seasonal, with the largest demand during the fall, the winter, and Christmas holidays. The company must increase production each summer to meet estimated demand.

The company has been analyzing its costs to determine which costs are fixed and variable for planning purposes. Below are data for the company’s activity and direct labor costs over the last year.

The number of workdays varies from month to month due to the number of weekdays, holidays, and days of vacation in the month. The paid days include paid vacations (in July) and paid holidays (in November and December). The number of units produced in a month varies depending on demand and the number of workdays in the month.

The company has eight workers who are classified as direct labor.

Required:

1. Plot the direct labor cost and units produced on a scattergraph_ (Place cost on the vertical axis and units produced on the horizontal axis.)
2. Plot the direct labor cost and number of paid days on a scattergraph. (Place cost on the vertical axis and the number of paid days on the horizontal axis.)
3. Which measure of actievity—number of units produced or paid days—should be used as the activity base for explaining direct labor cost? Explain.