Townson Company is making plans for the introduction of a new product, which has a target selling price of $7 per unit. The following estimates of manufacturing costs have been derived for 6 million units, to be produced during the first year: Direct material: $6,000,000 Direct labor: $2,100,000 (at $14 per hour)Overhead costs have not yet been estimated, but monthly data on total production and overhead for the past 12 months have been analyzed by using least-squares regression. The major overhead cost driver is direct labor hours, with the following results: Computed values: Fixed overhead cost: $3,200,000 Coefficient of independent variable: $2.25Required: A. Prepare the company's regression equation (Y = a + bX) to estimate overhead.B. Calculate the predicted overhead cost
at an activity level of 6,300,000 units.C. What is Townson's dependent variable in this case?
What will be an ideal response?
| A. | Y = $3,200,000 + $2.25X |
| B. | Direct labor: |
For 1 unit, direct labor totals 0.025 hours (150,000 ÷ 6,000,000).
For 6,300,000 units, direct labor totals 157,500 hours (6,300,000 × 0.025).
Y = $3,200,000 + (157,500 × $2.25) = $3,554,375
| C. | The dependent variable is Y, or total overhead cost. |
Business
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