Question

Using Regression Results to Construct and Apply a Cost Formula

Dohini Manufacturing Company had the following 12 months of data on purchasing cost and number of purchase orders.

Month		Purchasing Cost		Number of Purchase Orders
January		$18,860		370
February		18,065		330
March		19,250		370
April		18,050		410
May		19,345		400
June		19,500		450
July		19,670		460
August		20,940		560
September		19,430		440
October		20,020		500
November		18,800		470
December		19,340		480

The controller for Dohini Manufacturing ran regression on the data, and the coefficients shown by the regression program are:

Intercept	15,021 (rounded to the nearest dollar)
X variable 1	9.74 (rounded to the nearest cent)

Required:

A. Construct the cost formula for the purchasing activity showing the fixed cost and the variable rate.

Total purchasing cost

=

$

+

($ × Purchase orders)

B. If Dohini Manufacturing Company estimates that next month will have 430 purchase orders, what is the total estimated purchasing cost for that month? (Round your answer to the nearest dollar.)

C. What if Dohini Manufacturing wants to estimate purchasing cost for the coming year and expects 5,340 purchase orders? What will estimated total purchasing cost be? (Round your answer to the nearest dollar.) What is the total fixed purchasing cost?

Answer 1

Answer A:

($9.74 x Purchase orders) Total purchasing cost $15,021

Working:

Given:

Intercept	15,021 (rounded to the nearest dollar)
X variable 1	9.74 (rounded to the nearest cent)

Hence:

Fixed cost = Intercept = $15,021

Variable cost per purchase order = $9.74

Hence the equation will be:

Total purchasing cost = $15,021 + $9.74 x Number of Purchase Orders

Answer B:

Company estimates that next month will have 430 purchase orders:

Total purchasing cost = $15,021 + $9.74 x Number of Purchase Orders

= 15021 + 9.74 * 430

= $19,209.20

Total estimated purchasing cost for that month = $19,209

Answer C:

Company expects 5,340 purchase orders for coming year (12 months)

The Monthly purchase cost equation is:

Total purchasing cost = $15,021 + $9.74 x Number of Purchase Orders

Hence:

Estimated total purchasing cost for coming year = 15021 * 12 + 5340 * 9.74 = $232,263.60

Total fixed purchasing cost = 15021 * 12 =$180,252

Hence:

Estimated total purchasing cost for coming year = $232,264

Total fixed purchasing cost = $180,252