Mickey Toys Company is attempting to determine the behavior of setup costs for its Minneapolis Plant. Two possible activity drivers have been mentioned: direct labor hours and number of batches produced. The plant controller has accumulated the following data.

Month Overhead Direct Labor Number of

                  Cost            Hours           Batches

Feb.         7,700          2,000               55

Mar.          7,690        2,100               50

April        10,400         3,100               75

May          9,400        2,700               62

June         9,584        2,800               65

July          8,680        2,500               58

Aug.         8,550        2,400               56

Sept.        9,735        2,900               66

Oct.        10,500        3,000               80

Required:

1. Prepare a Scattergraph by plotting Overhead costs (y axis) against Direct Labor Hours (x axis).

a. Fit a line to the data (scatter graph); select any two points and determine the cost equation for Overhead costs.

b. Using a high-low method, compute the cost formula for Overhead with Direct Labor Hours as the activity.

c. Estimate a regression equation with direct labor hours as the activity driver. If the Minneapolis plant forecasts 2,600 direct labor hours for November, what will be the estimated overhead cost?

2. Repeat parts a, b, and c with number of batches as the activity driver. If the Minneapolis plant forecasts 85 batches for November, what will be the estimated overhead cost?

3. Which of the two regression equations (from part 1 & 2) does a better job of predicting overhead costs? Explain why