Methods of Estimating Costs-Account Analysis and Regression Methods-Bayview Manufacturing Company: (Computer required.) Bayview Manufacturing Company is preparing cost estimates for the coming year. The controller's staff prepared a preliminary income statement for the coming year based on an analysis of the various cost accounts and on a study of orders received. The projected income statement appeared as follows:

Bayview produces three products: A, B, and C. A profit per unit for each product has been prepared by management and appears as follows:

On the basis of this information, the company planning committee decided that as few Cs should be produced as possible. Moreover, the committee recommended that the company emphasize the production of A and perhaps start a promotional campaign to increase sales of A.

Before a final recommendation on the plan, the management planning committee asked the controller's office to make certain that these profit numbers were correct. A review of the controller's recommendations indicated that the controller esti- mated that 20 percent of the overhead was variable and that 50 percent of the marketing costs were also variable.

Some additional data have been gathered from the accounting records. First, the units are produced in two departments (molding and finishing). The following production rates indicate the times required to produce each unit in each department:

Direct labor cost and overhead incurred in each department and for the company as a whole over the past 10 years is as follows:

Production cost relationships have not changed over this period. Information on marketing costs for the past 10 years and on the sales of products A, B, and C for the same period was obtained also. These data are:

Required:

a. Comment on the use of the per unit profit measures for planning purposes.

b. Use regression estimates to determine if the estimates of fixed and variable overhead are reasonable.

c. Would you recommend the use of plantwide or departmental overhead rates? Why?

d. Prepare regression estimates of the fixed and variable components of marketing costs.

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Sales revenue Cost of sales: Direct materials Direct labor Factory overhead Total cost of sales Gross profit Marketing costs Projected operating profil $3,000,000 $1,182,000 310,000 775,000 2,267,000 733,000 450,000 $ 283,000