Question

An important application of regression analysis in accounting is in the estimation of cost. Bycollecting data on volume and cost and using the least squares meathod to develop an estimated regression equation relating volume and cost, an accountant can estimate the cost associated with a particular manufacturing volume. Consider the following sample of production volumes and total cost data for a manufacturing operation.

Production Volume (units)Total Cost ($)
4004000
4505000
5505400
6005900
7006400
7507000
A. Use these data to develop an estimated regression equation that could be used to predict the total cost for a given production volume.
B. What is the variable cost per unit produced?
C. Compute the coefficient of determination. What percentage of the variation in total cost can be explaned by production volume?
D. The company's production schedule shows 500 units must be produced next month. What is the estimated total cost for this opperation?

Answer 1

Instructions are listed below.

Step-by-step explanation:

Giving the following information:

Consider the following sample of production volumes and total cost data for a manufacturing operation.

Production Volume (units)Total Cost ($)

400units $4000

450units $5000

550units $5400

600units $5900

700units $6400

750units $7000

We will use the high-low method to calculate variable cost and fixed cost.

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ highest activity units - Lowest activity units)

Variable cost per unit= (7000 - 4000)/(750 - 400)= $8.57

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 7000 - (8.57*750)= 572

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 4000 - (8.57*400)= 572

Proportion of variable cost= 8.57/572= 0.0149= 1.49%

500 units= 572 + 500*8.57= 4,857