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High-Low, Scattergraph, and Regression Analysis; Manufacturing Company. Kitchen Products, Inc., produces kitchen counter tops. Manufacturing overhead costs tend to fluctuate from one month to the

High-Low, Scattergraph, and Regression Analysis; Manufacturing Company. Kitchen Products, Inc., produces kitchen counter tops. Manufacturing overhead costs tend to fluctuate from one month to the next, and management would like to accurately estimate these costs for planning and decision-making purposes.

The accounting staff at Kitchen Products recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff believes the best starting point is to review historical data for costs and machine hours:

Reporting Period (Month) Total Costs Machine Hours
January $278,000 1,550
February 280,000 1,570
March 266,000 1,115
April 290,000 1,700
May 262,000 1,110
June 269,000 1,225
July 275,000 1,335
August 286,000 1,660
September 250,000 1,000
October 253,000 1,020
November 260,000 1,025
December 281,000 1,600

These data were entered into a computer regression program, which produced the following output:

Coefficients
y-intercept 210,766
x variable 45.31

Required:

Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.

Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.

Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.

Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 1,300 machine hours. (You will have three different answersone for each method.) Which approach do you think is most accurate and why?

Management likes the regression analysis approach and asks you to estimate costs for 5,000 machine hours using this approach (the company plans to expand by opening another facility and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.

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