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# Exercise 6-26 Cost Classification

Requirement

Match each cost to the appropriate cost behavior pattern shown in the graphs (a) through (
fit two or more patterns.

Solution

## Comptech hired Erwin & Associates to design a new computer-aided m

capacity to produce 250 computers per day. The variable costs for e
Solution

## gn a new computer-aided manufacturing facility that has the

ay. The variable costs for each computer are \$150 and the

## Exercise 6-28 Cost Relationships

Background
The following costs are for Optical View Inc., a contact lens manufacturer:
Output in Units
250
300
350
400

Fixed Costs
\$4,750
\$4,750
\$4,750
\$4,750

Variable Costs
\$7,500
\$9,000
\$10,500
\$12,000

6-28 Requirements
1. Graph total cost, total variable costs, and total fixed costs.
2. Graph the per-unit total cost, per-unit variable cost, and per-unit fixed cost.
3. Discuss the behavior of the fixed, variable, and total costs.
Solution

nufacturer:
Total Costs
\$12,250
\$13,750
\$15,250
\$16,750

Units
Avg. Cost
500
\$0.55
600
\$0.50
560
?
Solution

## Exercise 6-30 Cost Estimation Using Graphs, Service

Background

\$2,500
\$3,000
\$3,500
\$4,000
\$4,500
\$5,000

Annual Sales
\$95,000
\$110,000
\$124,000
\$138,000
\$143,000
\$147,000

\$5,500

\$150,000

6-30 Requirements
1. Graph annual sales and advertising expense.
2. Do the data prove Sue's point?

Solution

## Wang Manufacturing uses regression analysis to predict manufactur

labor hours and/or
machine
hours, and
has developed
the three follow
Regression
1
Regression
2 Regression
3
SE
R-squared
t-values:
Labor Hours
Machine Hours

Solution

33,844
0.55

45,383
0.35

31,044
0.58

1.1

1.9
0.8

2.3

## lysis to predict manufacturing overhead costs based on

session
developed
the three following regression equations.
3
31,044
0.58
1.9
0.8

Background

## Horton Manufacturing Inc. produces blinds and other window treatme

The owner is concerned about the maintenance costs for the production mac
Problem Information
Month
1
2
3
4
5
6
7
8
9
10
11

Expense
\$2,625
\$2,670
\$2,720
\$2,820
\$2,855
\$3,005
\$2,865
\$2,905
\$2,780
\$2,570
\$2,590

Hours
1499
1590
1605
1655
1775
1880
1785
1805
1695
1410
1550

12

\$2,890

1405

6-32 Requirements
What is the cost equation for maintenance cost using the high-low method?

Solution

## nd other window treatments for residential homes and offices.

ts for the production machinery, as maintenance costs for the

-low method?

Background

## Ethan Manufacturing Inc. produces floor mats for automobiles

Month
1
2
3
4
5
6
7
8
9
10
11

Expense
\$2,600
\$2,760
\$2,910
\$3,020
\$3,100
\$3,070
\$3,010
\$2,850
\$2,620
\$2,220
\$2,230

Machine-Hours
1,690
1,770
1,850
1,870
1,900
1,880
1,860
1,840
1,700
1,100
1,300

12

\$2,450

1,590

6-33 Requirements
What is the cost equation for maintenance cost using the high-low method?

Solution

ts for automobiles.

method?

The owner,

## 6-34 Interpreting Regression Results Recent research into the

procedures has shown the impact of certain complications encounter
cost of patients stay in the hospital. The researchers used regressio
following results:
Total Cost for Patient = Constant, plus

## a x length of stay (measured in days), plus

b x presence of one or more complications (1 if true, 0 if false), plus
c x use of a laparoscope (1 if true, 0 if false)
Where:
a, b, c are coefficients of the regression model, and

## The laparoscope is an instrument somewhat like a miniature tele

system which brings light into the abdomen. It is about as big aroun
twice as long.
The

research,

based

on

57

patients,

showed

the

follow

r-squared: 53%
constant term: \$3,719
Coefficients and t-values for independent variables:

Coefficient
t-value
Required

Length of Stay
\$861
10.76

Complication
\$1,986
4.89

Lap

Solution

## Recent research into the cost of various medical

in complications encountered in surgery on the total
researchers used regression analysis and found the

us
ns (1 if true, 0 if false), plus
se)

model, and

## ewhat like a miniature telescope with a fiber optic

en. It is about as big around as a fountain pen and

nts,

showed

the

following

regression

variables:
Complication
\$1,986
4.89

Laproscope
\$908
2.54

results:

## The Following table shows the regression results presented by the

in Exercise 6-34. The right hand column shows the results for the
column shows the results for the sample of patients who were
surgery, and the related costs.

## Coefficients for Independent Variables

Regression Intercept
Length of Stay
Coefficient*
Standard error for the coefficient
Number of Complications
Coefficient
Standard error for the coefficient
Laparascopic
Coefficient
Standard error for the coefficient

Not Laparoscopic

La

8,043

Not significant
Not applicable
3,393
1,239
Not applicable
Not applicable

R-squared
0.11
0.5
*Note: All independent variables are significant at the level of p=
length of stay variable in the Non-laparoscopic condition.
Required

Solution

## n results presented by the researchers in the study described

shows the results for the laparoscopic surgery. The left hand
ple of patients who were treated without the laparoscopic

ot Laparoscopic
8,043

Not significant
Not applicable
3,393
1,239

Not applicable
Not applicable

Laparoscopic
\$

3,719
861
80
1,986
406
908
358

11
0.53
gnificant at the level of p=.05 (and t-value >2) except for the
scopic condition.

## Problem 6-36 Cost Estimation: High-Low Method

Background

Jay Bauer Company specializes in the purchase, renovation, and resale of olde
and painters to do the work for him. It is essential for him to have accurate cos
costs before he purchases a piece of property. If estimated renovation costs plus
estimated resale value, the house is not a worthwhile investment.
Jay has been using the homes interior square feet for his exterior paint cost
House
1
2
3
4
5
6
7
8
9
10
11

Square Feet
2,600
3,010
2,800
2,850
4,050
2,700
2,375
2,450
2,600
3,700
2,650

Openings
13
15
12
12
19
13
11
11
10
16
13

12

3,550

16

6-36 Requirements

1. Using the high-low cost-estimation technique, determine the cost of painting a 3,300-squ
Also, determine the cost for a 2,400-square-foot house with 8 openings.
2. Plot the cost data against square feet and against openings. Which variable is a better c
Solution

## n, and resale of older homes. Jay Bauer employs several carpenters

to have accurate cost estimates so he can determine total renovation
renovation costs plus the purchase price of a house are higher than its
ment.
exterior paint cost estimations. Recently he decided to include the
Cost
\$3,300
\$3,750
\$3,100
\$3,150
\$4,700
\$3,250
\$2,800
\$2,800
\$2,875
\$4,100
\$3,200
\$3,950

Background

## SpectroGlass Company manufactures glass for office buildings in

California. As a result of age and wear, a critical machine in the produ
Output (square yards)

Machine A
Estimated Total Costs

4,000
7,000
9,000
14,000
16,000
24,000

\$54,600
\$78,800
\$90,300
\$114,900
\$132,400
\$210,000

6-37 Requirements

## 1. If SpectroGlass's output is expected to be 22,000 square yards, which machine should i

2. As a cost analyst at SpectroGlass, you have been assigned to complete Requirement 1.
you to say that the nature of the defect is really very difficult to detect and that most cust
replacing it. He suggests that you modify your calculations to justify keeping the present
and save the company some money. What do you say?
3. Assume that brand A is manufactured in Germany and brand B is manufactured in Cana
considerations are important to SpectroGlass, in addition to those already mentioned in

Solution

nt, Ethics

## glass for office buildings in Arizona and Southern

a critical machine in the production process has begun
Machine B
Estimated Total Costs
\$70,000
\$100,000
\$115,000
\$137,000
\$146,000
\$192,000

## yards, which machine should it purchase? At 15,000 square yards?

ned to complete Requirement 1. A production supervisor comes to
cult to detect and that most customers will not notice it, so he questions
ns to justify keeping the present machine to keep things the way they are

Background

## Antelope Park Amoco (APA) in Antelope Park, Alaska, has noticed

higher the colder the average monthly temperature is. The only thing i
is the furnace. Because of prevailing low temperatures, the furnace
(though less in the summer months and very little in August). Every
January
February
March
April
May
June
July
August
September
October
November

Avg. Temp F
31
41
43
44
46
50
53
60
50
40
30

Utility Cost
760
629
543
510
275
233
220
210
305
530
750

December

20

870

6-38 Requirements

Use the high-low method to estimate utility cost for the upcoming months of January and F
near-record average temperature of 10 degrees Fahrenheit; temperatures in February are
Fahrenheit.
Solution

## Alaska, has noticed that utility bills are substantially

ure is. The only thing in the shop that uses natural gas
eratures, the furnace is used every month of the year
little in August). Everything else in the shop runs on

## onths of January and February. The forecast for January is a

atures in February are expected to average 40 degrees

Problem 6-39

## Problems 639 through 643 are based on Armer Company, which is a

January
February
March
April
May
June
July
August
September
October
November
December
Sum
Average

Hours of Activity
480
320
400
300
500
310
320
520
490
470
350
340
4,800
400

## Average cost per hour (\$43,200/4,800) =

a (intercept)
b coefficient
Standard error of the estimate
R-squared
t-value for b

6-39 Requirements

If Armer Company uses the High-Low method of analysis, the equation for the relationship b
maintenance cost is?

Solution

Maintenance
Costs
\$4,200
\$3,000
\$3,600
\$2,820
\$4,350
\$2,960
\$3,030
\$4,470
\$4,260
\$4,050
\$3,300
\$3,160
\$43,200
\$3,600

,200/4,800) =

\$9.00
684.65
7.2884
34.469
0.99724
60.105

Problem 6-40

## Problems 639 through 643 are based on Armer Company, which is ac

January
February
March
April
May
June
July
August
September
October
November
December
Sum
Average

Hours of Activity
480
320
400
300
500
310
320
520
490
470
350
340
4,800
400

## Average cost per hour (\$43,200/4,800) =

a (intercept)
b coefficient
Standard error of the estimate
R-squared
t-value for b

6-40 Requirements

Based on the data derived from the regression analysis, 420 maintenance hours in a month
should be budgeted at:
Solution

Maintenance
Costs
\$4,200
\$3,000
\$3,600
\$2,820
\$4,350
\$2,960
\$3,030
\$4,470
\$4,260
\$4,050
\$3,300
\$3,160
\$43,200
\$3,600

\$43,200/4,800) =

\$9.00
684.65
7.2884
34.469
0.99724
60.105

Problem 6-41

## Problems 639 through 643 are based on Armer Company, which is ac

Hours of Activity
January
480
February
320
March
400
April
300
May
500
June
310
July
320
August
520
September
490
October
470
November
350
December
340
Sum
4,800
Average
400

## Average cost per hour (\$43,200/4,800) =

a (intercept)
b coefficient
Standard error of the estimate
R-squared
t-value for b

6-41 Requirements

The coefficient of determination for Armer's regression equation for maintenance activities i

Solution

Maintenance
Costs
\$4,200
\$3,000
\$3,600
\$2,820
\$4,350
\$2,960
\$3,030
\$4,470
\$4,260
\$4,050
\$3,300
\$3,160
\$43,200
\$3,600

\$43,200/4,800) =

\$9.00
684.65
7.2884
34.469
0.99724
60.105

## for maintenance activities is?

Problem 6-42

Problems 639 through 643 are based on Armer Company, which is acc

January
February
March
April
May
June
July
August
September
October
November
December
Sum
Average

Hours of
Activity
480
320
400
300
500
310
320
520
490
470
350
340
4,800
400

## Average cost per hour (\$43,200/4,800) =

a (intercept)
b coefficient
Standard error of the estimat
R-squared
t-value for b

6-42 Requirements
The percent of the total variance that can be explained by the regression equation is:

Solution

## n Armer Company, which is accumulating data to use in

Maintenance
Costs
\$4,200
\$3,000
\$3,600
\$2,820
\$4,350
\$2,960
\$3,030
\$4,470
\$4,260
\$4,050
\$3,300
\$3,160
\$43,200
\$3,600

ur (\$43,200/4,800) =
684.65
7.2884
34.469
0.99724
60.105

\$9.00

Problem 6-43

## Problems 639 through 643 are based on Armer Company, which is a

January
February
March
April
May
June
July
August
September
October
November
December
Sum
Average

Hours of Activity
480
320
400
300
500
310
320
520
490
470
350
340
4,800
400

## Average cost per hour (\$43,200/4,800) =

a (intercept)
b coefficient
Standard error of the estimate
R-squared
t-value for b

6-43 Requirements
At 400 hours of activity, Armer management can be approximately two-thirds confident that
be in the range of?

Solution

Maintenance
Costs
\$4,200
\$3,000
\$3,600
\$2,820
\$4,350
\$2,960
\$3,030
\$4,470
\$4,260
\$4,050
\$3,300
\$3,160
\$43,200
\$3,600

\$43,200/4,800) =
684.65
7.2884
34.469
0.99724
60.105

\$9.00

## Problem 6-44 Regression Analysis

Whittenberg Distributors, a major retailing and mail-order operation, has been in busines
During that time, its mail-order operations have grown from a sideline to represent more
companys annual sales. Of course, the company has suffered growing pains. At times, overl
programs resulted in lost sales, and scheduling temporary workers to augment the perm
periods has always been a problem.

Peter Bloom, manager of mail-order operations, has developed procedures for handling mos
is still trying to improve the scheduling of temporary workers to take customer telephone o
system, Peter keeps a permanent staff of 60 employees who handle the base telephone wo
this staff with temporary workers as needed. The temporary workers are hired on a daily
number needed for the next day the afternoon before based on his estimate of the upcoming

Peter has decided to try regression analysis to improve the hiring of temporary workers. B
labor hours into weekly totals for the past year, he determined the number of workers used e
listed the number of orders processed each week. After entering the data into a spre
regressions. Regression 1 related the total number of workers (permanent staff plus te
number of orders received. Regression 2 related only temporary workers to the number
output of these analyses follows:
Regression model: W = a + (b * T)
where: W = workers; T = telephone orders

Regression 1
a
b
Standard error of the estimate
t-value
Coefficient of determination
Durbin watson statistic

Regre

21.9380
0.0043
3.7210

-46
0.
1.

1.9500
0.6240

2.
0.

1.3300

1.

Required
1.

Peter Bloom estimates that Whittenberg Distributors will receive 12,740 orders duri
December.

a. Predict the number of temporary workers needed for this week using regression 1. R
nearest whole number.
b. Using regression 2, predict the number of temporary workers needed during this w
to the nearest whole number.

Data Inputs
a
b
Std error of the estimate
t-value
Coefficient of determ
Durbin-Watston statistic
est orders to be rec'd
number of perm workers
Solution

Regression 1
21.938
0.0043
3.721
1.95
0.624
1.33
12,740
60

## order operation, has been in business for the past 10 years.

wn from a sideline to represent more than 80 percent of the
suffered growing pains. At times, overloaded or faulty computer
mporary workers to augment the permanent staff during peak

## eveloped procedures for handling most problems. However, he

workers to take customer telephone orders. Under the current
es who handle the base telephone workload and supplements
mporary workers are hired on a daily basis; he determines the
based on his estimate of the upcoming telephone volume.

## ove the hiring of temporary workers. By summarizing the daily

ermined the number of workers used each week. In addition, he
After entering the data into a spreadsheet, Peter ran two
of workers (permanent staff plus temporary workers) to the
ly temporary workers to the number of orders received. The

Regression 1

Regression 2

21.9380
0.0043
3.7210

-46.5690
0.0051
1.4950

1.9500
0.6240

2.0400
0.7550

1.3300

1.6700

## utors will receive 12,740 orders during the second week of

ded for this week using regression 1. Round your answer to the

Regression 2
-46.569
0.0051
1.495
2.04
0.755
1.67

## Pilot Shop is a catalog business providing a wide variety of aviation products

the world. Maynard Shephard, the recently hired assistant controller, has been
cost function to forecast shipping costs. The previous assistant controller had
department costs each year by plotting cost data against direct labor-hours for
months and visually fitting a straight line through the points. The results were no

## After discussions with the shipping department personnel, Maynard decided

could be more closely related to the number of orders filled. He based his con
that 10 months ago the shipping department added some automated equipme
believes that using linear regression analysis will improve the forecasts of sh
data for the shipping department have been accumulated for the last 25 w
regression analyses of the data, one using direct labor-hours, and one using the
shipped. The information from the two linear regressions follows:

Equation
R-squared
Standard error of the
estimate
t-value
where:

SC
DL
NR

Regression 1

Regression 2

SC = 804.3 + 15.68DL
0.3650

SC = 642.9 + 3.92NR
0.7290

2.6520
1.8900

1.8840
3.4600

## = total shipping department costs

= total direct labor-hours
= number of cartons shipped

Required

## 1. Identify which cost function (regression 1 or regression 2) that Pilot Sho

forecasting total shipping department costs and explain why.
2. If Pilot Shop projects that 600 orders will be filled the coming week,
shipping department costs using the regression you selected in requireme
3. Explain two or three important limitations of the regression you selected
and identify one or two ways to address the limitations. Specifically include

Solution

## ety of aviation products to pilots throughout

ant controller, has been asked to develop a
st direct labor-hours for the most recent 12
nts. The results were not satisfactory.

## nnel, Maynard decided that shipping costs

filled. He based his conclusion on the fact
me automated equipment. Furthermore, he
rove the forecasts of shipping costs. Cost
ulated for the last 25 weeks. He ran two
hours, and one using the number of cartons
s follows:
Regression 2
SC = 642.9 + 3.92NR
0.7290
1.8840
3.4600

## ession 2) that Pilot Shop should adapt for

xplain why.
lled the coming week, calculate the total
ou selected in requirement 1.
regression you selected in requirement 1,
ions. Specifically include in your discussion

## Rock n Roll Heaven is an outdoor pavilion that presents musical per

season, from late spring to early fall. Rock n Roll presents a divers
approximately 40 events each season. In order to better project its co
Rock n Roll uses regression analysis to project expected ticket sales
performer. The regression results shown below are derived from the th
dependent variable for Rock n Roll is the number of paying tickets ho
independent variables are:

## 1. whether or not this particular performer appeared at Rock n Roll pre

no and 1 if yes)
2. the spending on advertising targeted to the performers appearance
3. the performers local sales of CDs in the most recent year prior to the
4. the number of television appearances for the performer in the most r
5. the number of public appearances in the U.S. by the performer in the
Independent Variables
Regression intercept

Results
1,224

## Attendance at prior concert

Coefficient
t-value

3,445
4.11

Coefficient
t-value

0.113
1.88

Performer's CD sales
Coefficient
t-value

0.00044
1.22

Television appearances
Coefficient
t-value

898
2.4

## Other Public performances

Coefficient
t-value
Television appearances
Coefficient
t-value

0.00044
1.22

898
2.4

## Other Public performances

R-squared
0.88
Standard error of the estimate 2,447
Required:

## 1. Using the above regression, what attendance would be predic

appeared at Rock n Roll previously, had 6 other public appearances
sales of \$10 million, and Rock n Roll planned to spend \$35,000 on adv
Data Input
Independent Variables
Regression intercept

Results
1,224

## Attendance at prior concert

Coefficient
t-value

3,445
4.11

Coefficient
t-value

0.113
1.88

Performer's CD sales
Coefficient
t-value

0.00044
1.22

Television appearances

Coefficient
t-value

898
2.4

## Other Public performances

Coefficient
t-value

1,233
3.7

R-squared
Standard error of the estimate

0.88
2,447

Dummary variable:
"no" = 0
"yes" = 1
Requirements

1. Using the above regression, what attendance would be predicted for a performer who ha
previously, had six other public appearances but no TV appearances, and had CD sales
planned to spend \$35,000 on advertising?
2. Evaluate the precision and reliability of the regression results shown above. What chang
regression? Which variables should be deleted, and which do you think should be added

Solution

## hat presents musical performers throughout a 6 month

n Roll presents a diverse venue of artists in a set of
der to better project its costs and expected attendance,
ect expected ticket sales for upcoming events for each
w are derived from the three most recent seasons. The
umber of paying tickets holders for each event, and the

## peared at Rock n Roll previously (a dummy variable,

performers appearance
ost recent year prior to their appearance
he performer in the most recent year
.S. by the performer in the recent year

## ndance would be predicted for a performer who had

other public appearances but no TV appearances, CD

## cted for a performer who had appeared at Rock n' Roll

rances, and had CD sales of \$10 million, and Rock n' Roll

## shown above. What changes, if any, do you propose for the

you think should be added, and why?

## PolyChem is a large manufacturer of packaging materials for s

applications; the packages are used by customers to carry away th
succeeded for many years by providing a high quality product a
Recently, additional competitors have entered the market, both local
PolyChem is finding that it must increasingly compete on price. Po
with the increased competition is to market its products to smaller ret
firms quality and service, as well as the firms ability to customize
designs and colors to the packaging material. Until recently, the
based on simple averages of materials purchases, plant labo
management is now interested in improving, if possible, the accura
start, Cheryl Greenberg, the management accountant, obtains the f
1) from the plant manager, showing the machine number, the order s
machine setup time (in hours per unit; setup time also includes clean
runtime (the operating time for the machine to produce the order), an
of the order based on a subjective rating where 1= less complex and
relates to the number and type of images and colors printed on the pa

## Cheryl wants to run some regression analyses to better understan

obtains a correlation analysis which shows the simple correlation be
Table 1.
The results are shown in Table 2. Cheryl understand
numbers in Table 2 is equivalent to the R-squared for a simple
variable, as follows: (correlation between two variables)2 = the R
analysis between these two variables. To illustrate, note that the
number and order quantity = -0.33919. The R-squared for the
variables (with either as the dependent variable) is (-0.33919)2 = 0.

## Table 1 Plant Data for PolyChem

Machine Order
Number Size
2
480
2
489
2
480
4
180
4
2160

Order
Per Unit
Complexity Setup time Runtime
1
0.002
0.042
1
0.000
0.043
2
0.005
0.042
1
0.004
0.040
1
0.002
0.035

## Table 1 Plant Data for PolyChem

Machine Order
Number Size
2
480
2
489
2
480
4
180
4
2160
4
1377
4
120
4
540
4
360
4
1080
4
300
4
2400
4
81
8
360
8
120
8
120
8
60
8
240
8
60

Order
Per Unit
Complexity Setup time Runtime
1
0.002
0.042
1
0.000
0.043
2
0.005
0.042
1
0.004
0.040
1
0.002
0.035
1
0.002
0.040
2
0.004
0.040
1
0.003
0.041
2
0.014
0.041
2
0.011
0.038
1
0.004
0.043
2
0.005
0.035
2
0.046
0.041
1
0.002
0.043
1
0.002
0.043
2
0.007
0.042
2
0.008
0.042
1
0.008
0.043
2
0.005
0.047

Set
Number
Order Size
Complexity
Setup time
Runtime

Requirements

Solution

Number
1
-0.33919
0.071001
-0.03805
0.346651

## Order Size Complexity time

1
-0.07095
-0.20952
-0.80882

1
0.4521388 1
-0.140537 -0.06534

## kaging materials for supermarkets and other retail

omers to carry away their purchases. PolyChem has
high quality product and superior customer service.
d the market, both local and from other countries, and
y compete on price. PolyChems strategy for dealing
products to smaller retailers that would appreciate the
ms ability to customize the product adding different
ial. Until recently, the firm determined product costs
purchases, plant labor and overhead. The firms
if possible, the accuracy of its cost information. As a
countant, obtains the following sample of data (Table
ine number, the order size (quantity, in thousands), the
ime also includes clean up time after the order is run),
o produce the order), and a measure of the complexity
re 1= less complex and 2 is more complex (complexity
colors printed on the packaging material).

## ses to better understand this data and as a first step

he simple correlation between each of the variables in
2. Cheryl understands that each of the correlation
-squared for a simple linear regression between the
wo variables)2 = the R-squared for simple regression
llustrate, note that the correlation between machine
he R-squared for the regression between these two
ble) is (-0.33919)2 = 0.1151. Cheryl also recalls that a

ntime
42
43
42
40
35

ntime
42
43
42
40
35
40
40
41
41
38
43
35
41
43
43
42
42
43
47

Plant Data
Setup

ze Complexity time

1
0.4521388 1
-0.140537 -0.06534

Runtime

## Problem 6-48 Regression Analysis

United States Motors Inc. (USMI) manufactures automobiles and light trucks
sale to consumers through franchised retail outlets. As part of the franchise
must provide monthly financial statements following the USMI accounting pro
has developed the following financial profile of an average dealership that s
annually.
AVERAGE DEALERSHIP FINANCIAL PROFI
Composite Income Statement
Sales
Cost of goods sold
Gross profit
Operating costs
Variable expenses
Mixed expenses
Fixed expenses
Operating income

\$30,000,000
24,750,000
\$5,250,000
862,500
2,300,000
1,854,000
\$233,500

## USMI is considering a major expansion of its dealership network. The vice

has asked Jack Snyder, corporate controller, to develop some measure of
the addition of these franchises. Jack estimates that 90 percent of the mixe
variable for purposes of this analysis. He also suggested performing regre
various components of the mixed expenses to more definitively determine the
Required

## 1. Calculate the composite dealership profit if 2,000 units are sold.

2. Assume that regression analyses were performed on the separate compon
expenses and that a coefficient of determination value of 0.60 was determ
aggregate mixed expenses over the relevant range.
a. Define the term relevant range.
b. Explain the significance of an R-squared value of 0.60 to USMIs ana
c. Describe the limitations that may exist in applying the compositespecific new dealerships that have been proposed.
d. Define the standard error of the estimate.
3. The regression equation that Jack Snyder developed to project annual sa
an R-squared of 60 percent and a standard error of the estimate of \$4,50
annual sales for a dealership total \$28,500,000, determine the app

Input Data
Annual sales volume, average dealership =
Sales Revenue
CGS
Gross Profit
Operating expenses:
Variable
Mixed
Fixed
Operating income

\$862,500
\$2,300,000
\$1,854,000

## % of mixed costs that are variable =

estimated sales volume (part 1) =
Std error of the regression (part 3) =
Projected sales dollars (part 3) =
No. std deviations (for CI, part 3) =
Solution

## tomobiles and light trucks and distributes them for

. As part of the franchise agreement, dealerships
g the USMI accounting procedures manual. USMI
average dealership that sells 1,500 new vehicles

Income Statement

000,000
750,000
250,000

862,500
300,000
854,000
233,500

## lership network. The vice president of marketing

evelop some measure of the risk associated with
hat 90 percent of the mixed expenses shown are
uggested performing regression analyses on the
e definitively determine their variability.

## 0 units are sold.

d on the separate components of the mixed
value of 0.60 was determined as applicable to
nge.

## alue of 0.60 to USMIs analysis.

applying the composite-based relationships to
roposed.

## oped to project annual sales of a dealership has

or of the estimate of \$4,500,000. If the projected
,000, determine the approximate 95 percent

1,500
\$30,000,000
\$24,750,000
\$5,250,000

\$5,016,500
\$233,500
90.00%
2,000
\$4,500,000
\$28,500,000
2

## Problem 6-49 Cost Estimation, High-Low Method, Regression Analysis

Problem Information

DVD Express is a large manufacturer of affordable DVD players. Management recently became aware
costs resulting from returns of malfunctioning products. As a starting point for further analysis, Bridget
the controller, wants to test different forecasting methods and then use the best one to forecast quarte
for 2007. The relevant data for the previous three years is as follows:
2004
Quarter
1
2
3
4

Return
Expenses
\$15,000
\$17,500
\$18,500
\$18,600

2005
Quarter
1
2
3
4

Return
Expenses
\$16,200
\$17,800
\$18,800
\$17,700

2006
Quarter
1
2
3
4

Return
Expenses
\$16,600
\$18,100
\$19,000
\$19,200

The result of a simple regression analysis using all 12 data points yielded the following:
Intercept term
Coefficient estimate
R-squared
t-statistic
SE

\$16,559
\$183.22
0.27
1.94
1,128

6-49 Requirements

1. Calculate the quarterly forecast for 2007 using the high-low method and regression analysis. Recommend which m
Bridget should use.
2. How does your analysis in requirement 1 change if DVD Express manufactures its products in multiple global prod
facilities to serve the global market?

Solution

## t recently became aware of rising

urther analysis, Bridget Forrester,
st one to forecast quarterly expenses

## Problem 6-50 Cost Estimation, High-Low Method, Regression Analysis

Problem Information

Clothes for U is a large merchandiser of apparel for budget-minded families. Management recently
2004
Quarter

W&T
Expenses

2005
Quarter

W&T
Expenses

2006
Quarter

W&T
Expenses

1
2
3
4

\$12,500
\$11,300
\$11,600
\$13,700

1
2
3
4

\$12,900
\$12,100
\$11,700
\$14,000

1
2
3
4

\$13,300
\$12,300
\$12,100
\$14,600

## Simple regression results:

Intercept term (constant) =
Slope coefficient (variable cost rate) =
R-squared (coefficient of determination) =
t-statistic =
SE =

\$11,854.55
\$126.22
0.19
1.5
974

6-50 Requirements
1. Calculate the quarterly forecasts for 2007 using the High-Low method and using regression analysis. Recommend which method
Gregory should use.
2. How does your analysis in requirement 1 change if Clothes for U is involved in global sourcing of products for its stores?

Solution

## The Air Force Museum Foundation has commissioned the purchase o

aircraft. They will be built completely from scratch to the exact specificat
authentication, the aircraft will be made using the technology and man
the originals were built. Each of the 16 will be flown to Air Force an
country for exhibition. Aviation enthusiasts can also visit the product
aircraft were built in 1938.
Soren Industries wants to bid on the aircraft contract and asked for a
about the Four F Sixes from the Air Force. The information includes
builders of the original aircraft. The available information is for the total
and thirty-second aircraft, respectively, were completed.
Output
1
8
32

Total Hours
250
1,458

Required

Input Data
Output
1
8
32

Total Hours
250
1,458
4,724

Requirements

1. If Soren Industries expects that the time spent per unit will be the same as it was in 1938
the 16 aircraft for the Air Force Museum Foundation?

2. What is the role of learning curves in Soren Industries' business for contracts such as th

Solution

## mmissioned the purchase of 16 Four F Sixes, preWorld War II

cratch to the exact specifications used for the originals. As further
ng the technology and manufacturing processes available when
ll be flown to Air Force and aviation museums throughout the
can also visit the production facility to see exactly how such

. The information includes some of the old cost data from the
e information is for the total accumulated time as the first, eighth,
completed.

urs
0
8
4,724

be the same as it was in 1938, how many hours will it take to build

## Ben Matthews and David Everhart work for a landscaping company

Their principal job is to lay railroad ties to line the sidewalks around a
install flower boxes. The first time Ben and David undertook one of th
hours. Their goal by the end of the summer was to be able to finish
hours, one working day. They performed eight of these jobs and had a
Assume that all apartment complexes are approximately the same size
Data Inputs
Project #
1

Time
17

Solution

80%

## dscaping company in Twin Cities, Oklahoma.

sidewalks around apartment complexes and to
ndertook one of these projects, they spent 17
o be able to finish an apartment complex in 8
ese jobs and had an 80 percent learning curve.
ately the same size.

## Problem 6-53 Learning Curves

Problem Information

## Emotional Headdress (EH) is a Des Moines, Iowa, manufacturer of a

11, 2004, the company purchased a new machine to aid in prod
Production efficiency on the new machine increases with the workfo
cumulative output on the new machine increases, average labor tim
of at least 3,200 units. As EHs cumulative output doubles from a
labor time per unit declines by 15 percent. EHs production varies litt
hats per month.

## Emotional Headdress has developed a new style of mens hat, th

Decrase in Avg DLHs/Unit when output doubles
Average Hats/Month:
Fixed cost per month
Capacity (hats per month)

## New hat (the Morrisey):

Other Direct Costs/Hat:
Markup on Cost:
Batch size
Hours per batch
Direct labor cost per hour

15%
800
\$8,000
3,200

\$16.25
125%
100
25
\$15.00

6-53 Requirements

1. Emotional Headdress wishes to set the selling price for a Morrisey hat at 125% of the ha
level of 100 units, what is the estimated selling price?
2. The company has received an order for 1,600 Morrisey hats from Smiths, Inc. Smiths is
Should the company accept Smiths' order and produce the 1,600 hats? Explain.
Solution

## manufacturer of avant garde hats and headwear. On March

ne to aid in producing various established product lines.
es with the workforce experience. It has been shown that as
average labor time per unit decreases up to the production
t doubles from a base of 100 units produced, the average
oduction varies little from month to month and averages 800

s? Explain.

## Problem 6-54 Learning Curves

6-54 Requirements
Assumed learning curve =
the following schedule:
Direct labor cost/hour =
Batch size (units) =

80%

\$14.50
80

## 80% Learning Curve

Cumul
Output
80
160
320

Average
Time
60.00
48.00
38.40

Total
Time
4,800
7,680
12,288

Increase
in Time
4,800
2,880
4,608

Time Per
Unit
60.00
36.00
28.80

Note: the total time of 12,288 can also be derived by using the powerfunction
functions). Use the formula Y = ax-b , where Y = average time for the first unit (
learning rate of 80%. Set x = 4 and b = -0.322 in the Excel function to find 0.6
38.396 hours. Since Y = average time per unit, then 320 x 38.396 = 12,287 ho
Required

1. Hauser Company has an immediate requirement for a total of 1,000 units of the braking
direct labor costs to produce the required braking system if it manufactures the units in-h
2. A consultant has advised Joyce that the learning rate for this application might be closer
projected costs of having a 75% learning curve compared to an 80% learning curve?
3. What conditions in a manufacturing plant, if present, would offest the potential benefits o
strategic role of learning curve analysis for Hauser Company?

Solution

## using the powerfunction in Excel (one of the "Math and Trig"

ge time for the first unit (or batch) and b = 0.322 for a
Excel function to find 0.63993; 60 hours x 0.63993 =
20 x 38.396 = 12,287 hours.

## ,000 units of the braking system. Determine Hauser's future

anufactures the units in-house.
plication might be closer to 75%. What is the effect on
80% learning curve?
st the potential benefits of the learning curve? What is the

## Problem 6-55 Cost Estimation: Regression Analysis

Background
Plantcity is a large nursey and retail store specializing in house and garden plants and supplies. Jean Raouth, the assistant
manager, is in the process of budgeting monthly supplies expense for 2007. She assumes that in some way supplies expense
is related to sales, either in units or in dollars. She has collected these data for sales and supplies expenses for June 2004
through December 2006, and has estimated sales for 2007.

Problem Information

Background

## WasteTec is a large construction company that specializes in the

plants and recycling plants.
A major cost driver in either type
example, the capacity of a recycling plant is measured the num
plant can process. These plants can vary in size from a few hun
Problem Information

Location
Commerce, CA
Hudson Fall, NY
Layton, UT
Oxford Township, NJ
Savannah, GA
Poughkeepsie, NY
Panama City, FL
Ronkonkoma, NY
Okahuma,FL
Spokane, WA
Arlington, VA
Camden, NJ
York, PA
Bridgeport, CT
Chester, PA

TPD
360
400
420
450
500
506
510
518
528
800
975
1,050
1,344
2,250
2,688

6-56 Requirements

1. Develop a regression model to predict the cost of a propopsed new plant in Babylon,
of 750 TPD. What is the predicted cost for the Babylon plant, using your regression?
2. Evaluate the precision and reliability of the regression you have developed. How migh

Solution

## that specializes in the construction of large waste water treatment

st driver in either type of facility is the capacity of the plant. For
s measured the number of tons of waster per day (TPD) that the
in size from a few hundred TPD to as many as several thousand

Cost
\$59,369
\$77,013
\$50,405
\$75,779
\$87,439
\$57,463
\$60,730
\$84,457
\$88,119
\$152,902
\$127,021
\$163,395
\$139,302
\$344,852
\$448,073

## new plant in Babylon, NY, which will have a required capacity

e developed. How might it be improved?

Background

## Jim Manzano is the general partner of an investment group that owns a n

including a chain of 15 convenience stores located in the greater metropolitan
the recent increase in inventory theft and waste (he calls it spoilage) in hi
percent in each of the past two years. In some stores, the main reason is theft;
others, merchandise actually does spoil and must be thrown out. Jim has coll
recent month and is looking for patterns of spoilage relative to store size (m
employees, and total sales) and to the location of the store (location 1 is an ar
or vandalism are made, and location 3 is for areas with high arrests). Jim is n
managing convenience stores, that a relationship exists among these factors
called cross-sectional regression would suit his needs. The cross-sectional
for the dependent variable to the predicted value as a basis for assessing the re

Problem Information
Store
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

## Inventory Spoilage Square Footage

\$1,512
2,400
\$3,005
3,900
\$1,686
3,200
\$1,908
3,400
\$2,384
3,750
\$4,806
4,800
\$2,253
3,500
\$1,443
3,000
\$3,755
5,550
\$1,023
2,250
\$1,552
2,500
\$2,119
3,500
\$5,506
7,500
\$3,034
5,700
\$772
2,200

Number of
Employees
8
10
12
12
9
10
8
10
15
15
9
16
15
16
8

TOTALS

\$36,758

57,150

173

Requirements

1. Use regression analysis that predicts inventory spoilage at each of the 15 stores. Use a
independent variables (or a combination) you think appropriate and explain your answer. A
reliability of the regression you select.

2. Using the regression equation you developed in requirement 1, determine which of the 1
spoilage that is out of line relative to the entire chain of stores. Explain your choice.

Solution

## ment group that owns a number of commercial and industrial properties,

n the greater metropolitan area of Cleveland, Ohio. Jim is concerned about
calls it spoilage) in his stores. Spoilage has increased by more than 20
, the main reason is theft; in others, it is damage and vandalism; and in still
thrown out. Jim has collected data on spoilage at each of his stores in the
e relative to store size (measured by square feet of floor space, number of
store (location 1 is an area where few arrests for theft, disorderly conduct,
with high arrests). Jim is not sure, but he suspects, based on his experience
xists among these factors. A colleague told him that a type of regression
eeds. The cross-sectional regression is to compare the actual known value
basis for assessing the reasonableness of the actual value. This approach is

Location
1
2
1
1
2
3
1
1
2
1
1
2
3
2
1

Sales
\$312,389
\$346,235
\$376,465
\$345,723
\$453,983
\$502,984
\$325,436
\$253,647
\$562,534
\$287,364
\$198,374
\$333,984
\$673,345
\$588,947
\$225,364

\$5,786,774

## Problem 6-58 Regression Analysis in Tax Court Cases

Since at least the late 1960s, the court systems in the United States and else
regression analysis as evidence in court cases. In many instances, however,
or errors in developing the regression analysis, tax courts question or deny the
A study was performed recently to determine the factors in the regression a
Solution

## n the United States and elsewhere have accepted

n many instances, however, because of limitations
x courts question or deny the regression evidence.
e factors in the regression analysis that the court