Question

Cortez Company is planning to introduce a new product that will sell for $109 per unit. The following manufacturing cost estimates have been made on 20.000 units to be produced the first year: Direct materials Direct labor $ 800,000 480,000 = $16 per hour * 30,000 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 Coefficient on independent variable Coefficient of correlation $ 130,000 $ 5.00 .926 .857 Required: a. What percentage of the variation in overhead costs is explained by the independent variable? 85.7% 94.3% 102.8% 77.1% None of the above b. What is the total overhead cost for an estimated activity level of 70,000 direct labor-hours? $480,000 $490,000 $470,000 $500,000 None of the above

Answer 1

Answer :-

1.The correct answer is option A - 85.7%

Explanation

Percentage of variation in overhead costs explained by independent variable = R² ​​​​​​ = 0.857 or 85.7%

2.The correct answer is option A - $480,000

Explanation :-

Here, Total overhead =Intercept value +( coefficient on independent variable × 70000 Direct labor-hours)

Intercept value = $130,000

Coefficient on independent variable = $5

Total overhead = $130,000 + ($5 × 70,000 direct labor hours)

Total overhead = $480,000

3.The correct answer is option A - $72

Explanation :-

Variable manufacturing Cost per unit = Direct materials per unit + Direct labor per unit + variable overhead per unit

Direct materials cost per unit, = Total direct materials /No. Of Unit

Total direct materials = $800,000

No.of unit = 20,000

Direct materials cost per unit = 800,000 / 20,000 = $40

Direct Labor cost per unit = Total direct labor cost /No. Of Unit

Total direct labor cost = $480,000

Direct labor cost per unit = $480,000 / 20,000 = $24

No we find, Variable overhead cost per unit = Coefficient on independent variable × Labor hours required per unit

Labor-hours required per unit= Total labor hours/ No. Of unit

Total labor hours = 30,000 hours (it was given in question)

Labor hours required per unit = 30,000 / 20,000 = 1.5 hours per unit

Variable overhead cost per unit = $5 x 1.5 hours = $7.50

Variable manufacturing cost per unit = $40 + $24 + $7.50 = $71.50 or $72

4.The correct answer is Option A - $37

Contribution margin per unit=Sell Price - Variable manufacturing Cost per Unit

Sell price = $109

Contribution margin per unit = $109 - $72 = $37

5.The correct answer is option d - None of these

Explanation :-

Here, Total cost = Intercept + Variable Manufacturing costs per unit × No. Of Unit

Total cost = 130,000 + $72 x Number of Units