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0 . 5 . 4 . 5 . 9 ) 5 . 7 2 . Cost Estimation, CVP Analysis, and Decision Making Luke Corporation produces
Cost Estimation, CVP Analysis, and Decision Making
Luke Corporation produces is variety of products, each within their own division, Lay jeat,
machines. The product, which sells for $ per case, has not had the ma set sucese that mitet
ers expected, and the company is considering dropping Bubbs.
The productline income statement for the past months follows.
All products at Luke receive an allocation of corporate overhead costs, which is computed a
percent of product revenue. The percent rate is computed based on the most recent yeefs
corporate cost as a percentage of revenue. Data on corporate costs and revenues for the pastar
years follow.
Roy Q Andre, the product manager for Bubbs, is concerned about whether the product will
dropped by the company and has employed you as a financial consultant to help with some ant
sis. In addition to the information given. Mr Andre provides you with the following data ongent
uct costs for Bubbs.
Average monthly fixed costs $$
Variable cost per DLH $$
Variable cost per machinehour $$
Variable cost per unit produced $$
Based on the statistical results, overhead costs appear more closely related to output measured
in baskets than to laborhours. The coefficient of determination is for laborhours and
for baskets. This suggests that percent of the variation in overhead costs is "explained"
by laborhours, but percent is "explained" by output. However, we would not want to make
the determination based on statistical results alone. We should ensure that there are good rea
sons that overhead costs are related to output.
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