Woodstock Company is planning to introduce a new product that will sell for $12
ID: 3057848 • Letter: W
Question
Woodstock Company is planning to introduce a new product that will sell for $12 a unit. The following manufacturing cost estimates have been made on 100,000 units to be produced the first year.
Direct materials $100,000
Direct labour costs $80,000 (the wage rate is $8 an hour x 10,000 labour 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 analysed using simple linear regression. The following results were derived from simple regression and provided the basis for overhead cost estimates for the new product. The coefficient of independent variable represents the variable overhead rate. The cost driver for variable overhead is direct labour hours.
Simple Regression Analysis Results
Dependent variable – Factory overhead costs
Independent variable – Direct labour hours
Computed values
Intercept $120,000
Coefficient of independent variable $6.40
Coefficient of correlation 0.958
Coefficient of determination 0.918
What percentage of the variation in overhead costs is explained by the independent variable?
A. 90.8%
B. 97.9%
C. 95.8%
D. 91.8%
E. 84.3%
Explanation / Answer
Woodstock Company is planning to introduce a new product that will sell for $12 a unit. The following manufacturing cost estimates have been made on 100,000 units to be produced the first year.
Direct materials $100,000
Direct labour costs $80,000 (the wage rate is $8 an hour x 10,000 labour 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 analysed using simple linear regression. The following results were derived from simple regression and provided the basis for overhead cost estimates for the new product. The coefficient of independent variable represents the variable overhead rate. The cost driver for variable overhead is direct labour hours.
Simple Regression Analysis Results
Dependent variable – Factory overhead costs
Independent variable – Direct labour hours
Computed values
Intercept $120,000
Coefficient of independent variable $6.40
Coefficient of correlation 0.958
Coefficient of determination 0.918
What percentage of the variation in overhead costs is explained by the independent variable?
A. 90.8%
B. 97.9%
C. 95.8%
D. 91.8%
E. 84.3%
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