Frost-Byte is planning to introduce a new product that will sell for $12 a unit. A total of 100,000 units will be produced during the first year. Direct materials are projected to be $100,000 and labour costs amount to $80,000. The wage rate is $8 per hour and 10,000 labour hours are projected.

Manufacturing overhead costs have not been estimated for the new product, but monthly data on total production and overhead costs for the past 24 months have been analyzed using simple linear regression. The following results were derived from simple regression and provided the basis for overhead cost estimates for the new product. The coefficient of independent variable represents the variable overhead rate. The cost driver for variable overhead is direct labour hours.

 

Simple Regression Analysis Results

Dependent variable:   Factory overhead costs

Independent variable:  Direct labour hours

Computed values are as follows:

Intercept                                                                     $120,000

Coefficient of independent variable                           $6.40

Coefficient of correlation                                           0.958

Coefficient of determination                                     0.918

 

What percentage of the variation in overhead costs is explained by the independent variable?

Multiple Choice

• 95.8%

• 90.8%

• some other answer

• 97.9%

• 91.8%