Question

Cortez Company is planning to introduce a new product that will sell for $107 per unit. The following manufacturing cost estimates have been made on 20,000 units to be produced the first year Direct materials Direct labor $900.000 640,000 - $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 Coefficient of correlation R2 5 4.60 .929 .863 Required: a. What percentage of the variation in overhead costs is explained by the independent variable? O 86 30% O 94.90% O 103.60% 07770% O None of the above b. What is the total overhead cost for an estimated activity level of 70,000 direct labor-hours? O $400,000 cinnnn

Answer 1

Solution-

a) Percentage of variation in overhead costs explained by independent variable = R² = 0.863 or 86.3%

Ans :- The correct answer is = 86.30%

b) Total overhead cost = Intercept value + (coefficient on independent variable * 70000 direct labor-hours)

= $120000 + ($4 * 70000)

= $400000

Ans :- The correct answer is = $400000

c) Variable manufacturing cost per unit = Direct materials per unit + Direct labor per unit + Variable overhead per unit

= $45 + $32 +$8

= $85

working -

* Direct materials per unit = 900000 / 20000 = $45

* Direct labor cost per unit = 640000 / 20000 = $32

* Variable overhead cost per unit = $4 * 2 hours = $8

Note- Labor hours required per unit = 40000 / 20000 = 2hours per unit

Ans :- The correct answer is = $85

d) Contribution margin per unit = Sell price - Variable manufacturing cost per unit

= $107 - $85

= $22

Ans :- The correct answer is = $22