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The Leman Suitcase Company is trying to decide which independent variable would be a better predictor of advertising expense. The following regressions were run using sales dollars and units sold as the independent variables. Regression Analysis #1 Dependent variable - Advertising Expense Independent variable - Sales Dollars Computed values: Intercept Coefficient of independent variable Coefficient of correlation "R-SQUARED" 20,000 0.005 .91 .87 Regression Analysis #2 Dependent variable - Advertising Expense Independent variable - Units Sold Computed values: Intercept Coefficient of independent variable Coefficient of correlation "R-SQUARED" 16,000 4.00 .60 .48 A. Refer to the Leman Suitcase Company. Using sales dollars as the independent variable, what would be the prediction of advertising expense if sales are expected to be $80,000? B. Refer to the Leman Suitcase Company. Using units sold as the independent variable, what would be the prediction of advertising expense if 4,000 units are expected to be sold? C. Refer to the Leman Suitcase Company. Which regression formula is likely to be more reliable? Why? Use this information to answer the following question(s): The following output of overhead on direct labor hours was obtained using regression analysis: Equation: Intercept Slope $10,000 5 Statistical data: Correlation coefficient "R-SQUARED" 0.89 0.79 The company is planning to operate at a level that would call for 3,000 direct labor hours to be utilized for the coming year. D. Refer to the above data; use the regression output to write out the overhead cost equation. E. Refer to the above data. Based on the regression equation, compute the estimated overhead cost for the coming year. 1. The managers of Rockhurst Brewery are analyzing the costs involved in their beer production. (10 pts.) Rockhurst hired an engineering consulting firm to perform an engineering estimate of its business costs. The consulting firm came up with the following monthly cost estimates based on information for the current period: Facilities costs Beer production-level costs Raw materials costs Batch-level costs Water costs CIP costs New product costs $26,008.00 $13.5 per hL produced* $0.70 per kg consumed* $60 per batch* $0.90 per hL consumed* $18.5 per CIP performed $500 per new product* *Cost drivers: volume of beer produced (in hectoliters, i.e., 1 hL = 100 L), total amount of raw materials used (in kilograms), number of batches, volume of water used (in hL), number of cleaning procedures performedcleanings in place (CIPs)and number of new products. Required: Assuming the following level of cost driver volume for a month, what is the estimated cost using the engineering estimates? (Don't forget to include the facilities costs in your estimate.) 1,650 hL of beer produced 25,500 kg of raw materials consumed 100 Batches 10,800 hL of water consumed 120 CIPs 1 New product 2. Assume Fruit Delight Beverages has discovered a problem involving the mix of flavor to their seltzer water that costs the company $4,000 in waste and $2,800 in lost business per period. There are two alternative solutions. The first is to lease a new mix regulator at a cost of $4,000 per period. The new regulator would save Fruit Delight Beverages $2,000 in waste and $2,000 in lost business each period. The second alternative is to hire an additional employee to manually monitor the existing regulator at a cost of $2,900 per period. This would save Fruit Delight Beverages $1,400 in waste and $800 in lost business per period. (10 pts.) Required: Which alternative should Fruit Delight Beverages choose? 3. The Caesar Company manufactures picnic tables. The company's Southeastern plant has changed from a labor-intensive operation to a robotics environment. As a result, management is considering changing from a direct-labor based overhead rate to an activity-based cost method. The controller has chosen the following activity cost pools and cost drivers for the factory overhead: (15 pts.) Purchase orders Set-up costs Testing costs Machine maintenance Expected Overhead Cost Cost Driver $200,000 Number of orders $25,000 Number of set-ups $48,000 Number of tests $250,000 Machine hours Annual Cost Driver 10,000 orders 5,000 set-ups 6,000 tests 10,000 hours Required: a. Compute the overhead rate for each cost driver. b. An order for 10 large picnic tables had the following requirements: Number of purchase orders Number of set-ups Number of product tests Machine hours 6 25 8 150 How much overhead would be assigned to this order? c. What could management do to reduce the overhead costs assigned to these tables? What would be the impact on company net income of reducing overhead assigned to the tables? 4. The law firm of Duwe, Cheatem & Howe provides legal services for clients. During the year, corporate clients required 5,000 hours of legal services, while individuals required 3,000 hours. The firm has traditionally used direct labor hours to assign overhead. (10 pts.) However, Ms. Duwe believes services to businesses cost more than services to individuals and wishes to adopt activity-based costing. The firm's revenues and costs for the year are shown below: Revenue Expenses: Lawyers' salaries Overhead: Filing Quality control Data entry Total overhead Corporate $150,000 Individual $150,000 Total $300,000 $100,000 50,000 $150,000 10,000 5,000 25,000 $40,000 Mr. Cheatem has kept records of the following data for use in the new activity-based costing system: Overhead Cost Cost Driver Filing Quality control Data entry Number of Clients Number of hours spent Number of pages entered Activity Level Corporate Individual 5 75 1,000 5 25 1,500 REQUIRED: a. Prepare an income statement showing profits by segments using the traditional directhour allocation base. b. Prepare an income statement showing profits by segments using the three cost drivers in the ABC model. c. Discuss the best way to allocate costs in this example and include the approximate difference in profits between Corporate and Individual clients. Why would Activitybased costing be preferred as a cost allocation method