Carveri Ltd is a leading manufacturer of navigation units for boats. It currently adopts a subjective approach to classifying overheads into their fixed and variable elements for the purpose of cost estimation. It is not entirely satisfied with its current approach and is looking for a more scientific way of estimating costs. The company has collected the following data for each of the last 12 months: Monthly production overhead costs Monthly machine-hours Monthly output of navigation units The data has been input to a computer package which has produced the following regression statistics:

I) Using monthly machine hours as the independent variable and production overhead costs as the dependent variable: y = -500 + 1.2x r 2 = 0.96 n = 12

II) Using monthly output of navigation units as the independent variable and production overhead costs as the dependent variable: y = 500 + 4.9x r 2 = 0.85 n = 12

Required

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

b) With reference to your estimates of overhead costs above, briefly discuss any reservations you might have regarding the relative value of each of these independent variables to cost estimation in this instance.