Question

Cortez Company is planning to introduce a new product that will sell for $96 per unit. The following manufacturing cost estimates have been made on 20,000 units to be produced the first year: Direct materials $ 800,000 Direct labor 640,000 (= $16 per hour × 40,000 hours) Manufacturing overhead costs have not yet been estimated for the new product, but monthly data on total production and overhead costs for the past 24 months have been analyzed using simple linear regression. The following results were derived from the simple regression and provide the basis for overhead cost estimates for the new product. Simple Regression Analysis Results Dependent variable—Factory overhead costs Independent variable—Direct labor-hours Computed values Intercept $ 120,000 Coefficient on independent variable $ 5.00 Coefficient of correlation 0.921 R2 0.848 Required: a. What percentage of the variation in overhead costs is explained by the independent variable? 92.10% 45.00% 84.80% 8.48% None of the above

Answer 1

84.80%

Explanation:

According to the given situation, the computation of the percentage of the variation is shown below:-

The Percentage of the variation is

= R^2 × Percentage

= 0.848 × 100

= 84.80%

Therefore for computing the percentage of the variation we simply applied the above formula.

hence, the percentage of variation is 84.80%