Question

Grant Corporation manufactures a drink bottle, model CL24. During 2017, Grant produced 220,000 bottles at a total cost of $990,000. Young Corporation has offered to supply as many bottles as Grant wants at a cost of $4.40 per bottle. Grant anticipates needing 235,000 bottles each year for the next few years. Read the requirements. Requirement 1a. What is the average cost of manufacturing a drink bottle in 2017? How does it compare to Young's offer? The average cost of $ per bottle is than Young's offer. Requirement 1b. Can Grant use the answer in requirement 1a to determine the cost of manufacturing 235,000 drink bottles? Explain. Grant take the average manufacturing cost in 2017 to determine the total cost of manufacturing 235,000 drink bottles. The reason is that Requirement 2. Grant's cost analyst uses annual data from past years to estimate the following regression equation with total manufacturing costs of the drink bottle as the dependent variable and drink bottles produced as the independent variable: y = $434,000 + $3.00X. During the years used to estimate the regres equation, the production of drink bottles varied from 210,000 to 245,000. Using this equation, estimate how much it would cost Grant to manufacture 235,000 drink bottles. How much more or less costly is it to manufacture the bottles rather than to acquire them from Young? Estimate how much it would cost Grant to manufacture 235,000 drink bottles, then calculate the cost to purchase the bottles. Estimated cost to make the bottles Cost to purchase the bottles $ $ It will cost $ to purchase the bottles rather than manufacture them in-house. Requirement 3. What other information would you need to be confident that the equation in requirement 2 accurately predicts the cost of manufacturing drink bottles? (Select all that apply.) A. How good is the goodness of fit? That is, how well does the estimated line fit the data? B. Does the slope of the regression line indicate that a strong relationship exists between manufacturing costs and the number of drink bottles produced? I C. Can Grant's competitors manufacture drink bottles at a cost less than Grant? D. Is the relationship between total manufacturing costs and quantity of drink bottles economically plausible?

Answer 1

Average cost = total cost/number of units

= 990,000/220000 =$4.5 per bottle

Higher than offer

1b. Cannot use because a portion of it will be fixed cost which will not change due to change in units produced

2.estimated cost =434,000+3*235000 =$1,139000

Cost to purchase = 235000*4.4 =$1034000

Cost 105000 less to purchase

3.A, B and C