Maya Company is making plans for the introduction of a new hair product that it will sell for $6 per unit. The following estimates have been made for manufacturing costs on 100,000 units to be produced the first year:
Direct materials............................. $50,000
Direct labor................................... $80,000 (the labor rate is $8 an hour ×10,000 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 regression. The following results were derived from the regression and will provide the basis for overhead cost estimates for the new product.
REGRESSION ANALYSIS RESULTS
Dependent variable---Factory overhead costs
Independent variable---Direct labor hours
Computed values:
Intercept.................................................................. $55,000
Coefficient of independent variable....................... $ 3.20
Coefficient of correlation........................................ 0.953
R2............................................................................. 0.908
a. The total overhead cost for an estimated activity level of 20,000 direct labor hours would be
(1) $55,000
(2) $64,000
(3) $82,000
(4) $119,000
(5) Some other amount
b. What is the expected contribution margin per unit to be earned during the first year on 100,000 units of the new product? (Assume all marketing and administrative costs are fixed.)
(1) $4.38
(2) $4.89
(3) $3.83
(4) $5.10
(5) Some other amount
c. How much is the variable manufacturing cost per unit, using the variable overhead estimated by the regression (and assuming direct materials and direct labor are variable costs)?
(1) $1.30
(2) $1.11
(3) $1.62
(4) $3.00
(5) Some other amount
d. What is the manufacturing cost equation implied by these results, where x refers to units produced?
(1) TC = $80,000 + $1.11x
(2) TC = $55,000 + $1.62x
(3) TC = $185,000 + $3.20x
(4) Some other equation
e. (Answer if Appendix 5.2 was assigned reading.) What percentage of the variation in overhead costs is explained by the independent variable?
(1) 90.8 percent
(2) 42 percent
(3) 48.8 percent
(4) 95.3 percent
(5) Some other amount