FunSkis Company manu-factures snow and water skis. Snow skis are the primary product for the company. However, to keep part of the facility operating during the offseason for snow skiing, the company manufactures water skis during the offseason months. The company produces snow skis from July through January and water skis from February through June. During the months of February through June, the company significantly reduces the labor force and approximately two- thirds of the production equipment sits idle. FunSkis would like to better predict overhead cost and has chosen machine- hours as the cost driver for overhead cost. The following data has been gathered for the most recent year:

A regression analysis of 1 year of monthly data yields the following relationships:

Overhead costs = ($ 16.347 * Number of machine@ hours) - $ 2,695.80

Required

1. How should FunSkis interpret the negative intercept term based on the most recent 12- month period?

2. Plot the relationship between overhead costs and machine hours. What issue(s) do you recognize with the data?

3. Upon further reflection, FunSkis reanalyzes the data. The company realizes that it has two distinct operating “seasons”: July through January and February through June. Regression line for July through January:

Overhead costs = $ 3.087 * Number of machine@ hours + $ 3,327.40

Regression line for February through June:

Overhead costs = $ 2.914 * Number of machine@ hours + $ 290.55

a. Plot the data and the regression line for overhead costs and number of machine- hours for the period of July through January. b. Plot the data and the regression line for overhead costs and number of machine- hours for the period of February through June.

4. What, if any, are the implications of FunSkis using the regression line with all 12 months of data to budget for overhead costs, without adjusting forseasonality?

Transcribed Image Text:

Month January February March April May June July August September October November December Number of Machine-Hours 390 289 268 215 190 245 385 442 480 510 458 418 Overhead Costs $4,520 1,110 1,100 950 820 990 4,490 4,760 4,780 4,870 4,790 4,600