Question

Cortez Company is planning to introduce a new product that will sell for $108 a unit. The following manufacturing cost estimates have been made on 20,000 units to be produced the first year; Manufacturing overhead costs have not yet been estimated for the new product, but monthly date on total production and overhead costs for the post 24 months have been analyzed using simple linear regression. The following results were derive from the simple regression and provide the basis for overhead cost estimates for the new product. What percentage of the variation in overhead costs is explained by the independent variable? 82.8% 91.1% 99.4% 74.5% None of the above. What is the total overhead cost for an estimated activity level of 60,000 direct labor-hours?
$410,000.
$420,000.
$400,000.
$430,000.

Answer 1

Here is the full question with the appropriate tables.

Cortez Company is planning to introduce a new product that will sell for $108 a unit. The following manufacturing cost estimates have been made on 20,000 units to be produced the first year;

Direct Materials                     $700,000                                                              

Direct Labor                           $720,000    (= $18 per hour × 40,000 hours)    

Manufacturing overhead costs have not yet been estimated for the new product, but monthly date on total production and overhead costs for the post 24 months have been analyzed using simple linear regression. The following results were derive from the simple regression and provide the basis for overhead cost estimates for the new product.

                     Simple Regression Analysis  Results.                                          

Dependent  variable-Factory overhead cost-Independent Variable-Direct labor hours Computed values                                                                          

Intercept                                                                             $ 120,0000              

Coefficient on independent variable                               $ 5.00                        

Coefficient of correlation                                                   .920                          

R²                                                                                         .828                          

What percentage of the variation in overhead costs is explained by the independent variable? 82.8% 91.1% 99.4% 74.5% None of the above.

What is the total overhead cost for an estimated activity level of 60,000 direct labor-hours?

$410,000.

$420,000.

$400,000.

$430,000.

Answer:

R² = 82.8%

$420,000

Explanation:

Given that:

R² = .828

The percentage of the variation in overhead costs explained by the independent variable in Y from the X regressor = $\frac{.828}{100}%$%

= 82.8%

Given that:

direct labor-hours = 60,000

To calculate the Total overhead cost; we have:

(Total overhead) to be = Estimated fixed cost + estimated variable cost per  

                                        labor hour × labor-hours

                                      = Intercept estimate + Coefficient estimate on

                                       independent  variable × 60,000 direct labor-hours

                                      = $120,000 + ($5 × 60,000) direct labor-hours

                                      = $120,000 + $300,000

                                      = $420,000

∴  the total overhead cost for an estimated activity level of 60,000 direct labor-hours = $420,000.

Answer 2

Question: What percentage of the variation in overhead costs is explained by the independent variable

Answer: 82.8%

Explanation:

$R^{2}$ = 0.848 (84.8%), the explanation of variation in Y from the X regress

Question: What is the total overhead cost for an estimated activity level of 60,000 direct labor-hours

Answer: $410,000

Explanation:

The equation resulting from this regression analysis is:

Total overhead = Estimated fixed cost + Estimated variable cost per labor hour x Labor hours

= Intercept estimate + Coefficient estimate on independent variable x 60,000 DLH

= 110000 + 5 x 60000 DLH

= 110000 + 300000

= 410000