Cost-volume-profit and regression analysis. Oxbow Corporation manufactures a children’s bicycle, model CT8. It currently makes the bicycle frame in-house. During 2007, it manufac¬

tured 30,000 frames at a total cost of $1,080,000. Ryan Corporation has offered to supply as many frames as Oxbow wants at a cost of $34.20 per frame. Oxbow anticipates needing 36,000 frames each year for the next few years.

Required 1.

a. What is the average cost ofmanufacturing a bicycle frame in 2007? How does it compare with Ryan’s offer?

b. Can Oxbow use the answer in requirement 1

(a) to determine the cost of manufacturing 36,000 bicycle frames? Explain your answer.

2. Oxbow’s cost analyst uses annual data from past years to estimate the following regression equation with total manufacturing costs of the bicycle frame as the dependent variable (y)

and number of bicycle frames as the independent variable (A)

y = $518,400 + $18X During the years used to estimate the regression equation, the production of bicycle frames varied from 28,000 to 36,000. Using this equation, estimate how much it would cost Oxbow to manufacture 36,000 bicycle frames. How much more costly or less costly is it than acquiring the frames from Ryan?

What other information would you need in order to be confident that the equation in requirement 2 accurately predicts the cost ofmanufacturing bicycle frames?