Farnsworth Company has gathered data on its overhead activities and associated costs forthe past ten months. Tracy Heppler, a member of the controller's department, has con¬

vinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. Tracy has identified 150 different activities and has grouped activities into sets based on her belief that they share a common activity driver. (This classification process has reduced the number of cost for¬

mulas needed from 150 to 25.) For example, she has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity. This is based on her belief that the costs of the three related activities are all driven by the same activity driver—the number of purchase orders. To confirm her activity classification and activity driver assignment, she has gathered data for each set of activities. Ten months of data have been gathered for the receiving activity and are pre¬

sented next:

Required:
1. Prepare a scattergraph, plotting the receiving costs against the number of purchase orders. Use the vertical axis for costs and the horizontal axis for hours.
2. Select two points that make the best fit, and compute a cost formula for receiving costs.
3. _Using the high-low method, prepare a cost formula for the receiving activity.
4. Using the method of least squares, prepare a cost formula for the receiving activity.
What is the coefficient of determination?
5. Prepare a 95 percent confidence interv'al for receiving cost when 1,200 purchase orders are expected.

Transcribed Image Text:

Month Purchase Orders Receiving Cost 1234 1,000 $18,000 700 15,000 1,500 28,000 1,200 17,000 5 1,300 25,000 10 63820 1,100 21,000 7 1,600 29,000 1,400 24,000 9 1,700 27,000 900 16,000