Carveri Brown is a leading manufacturer of navigational fins. It currently adopts a subjective approach to classifying overheads into their fixed and variable elements for purposes of cost estimation. It is not entirely satisfied with its current approach and is looking for a more scientific way of estimating costs.

For each of the last 12 months it has collected the following data: monthly production overhead costs; monthly machine hours; and monthly output. The data have been input into a computer package which has produced the following regression statistics:

• Using monthly machine hours as the independent variable and production overhead costs as the dependent variable:

• Using monthly output as the independent variable and production overhead costs as the dependent variable:

(a) Calculate each independent variable’s estimate of production overheads in a month when 5000 machine hours will be used to produce 1000 fins.

(b) Comment on the relative value of each of these independent variables to cost estimation in this case.

(c) Identify five limitations of regression in cost estimation and explain carefully why each is a limitation.

Transcribed Image Text:

y=-500+ 1.2x, 7= 0.96, n = 12.