Chapter 8, Problem 41P

Refer to Problem 8.40 for data.

Required:

1. 1. Run a multiple regression equation using machine hours, number of setups, and number of purchase orders as independent variables. Prepare a flexible budget for overhead for the 12 months using the results of this regression equation. (Round the regression coefficients to the nearest cent and predicted overhead to the nearest dollar.) Which flexible budget is better—the one based on simple regression (with machine hours as the only independent variable) or the one based on multiple regression? Why?
2. 2. Now, suppose that the controller remembers that the factory throws two big parties each year, one for the 4th of July and the other for Christmas. Rerun the multiple regression with machine hours, number of setups, and number of purchase orders, and add a dummy variable called “Party.” (This variable takes the value one for months with a factory-sponsored party, and zero otherwise.) Prepare a flexible budget for the 12 months using the results of this regression. Discuss the implications of using this new regression for decision making.