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PART ONE Home Remodeling Inc. recently obtained a short-term bank loan from City National Bank. The bank required that certain credit information and pro forma

PART ONE

Home Remodeling Inc. recently obtained a short-term bank loan from City National Bank. The bank required that certain credit information and pro forma financial statements be maintained through the life of the loan. In order to prepare the pro forma statements, Home Remodeling must forecast total overhead cost. The actual machine hours and overhead cost are presented below for the past six months.

Month Overhead Cost Machine Hours
January $ 3,185 1,274
February 3,484 1,394
March 2,996 1,150
April 3,210 1,235
May 3,315 1,230
June 3,440 1,300

Using the high-low method, unit variable overhead cost is calculated to be:

  • $2.00.

  • $2.49.

  • $3.40.

  • $2.60.

  • $2.06.

PART TWO:

Armer Company is accumulating data to use in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested the use of linear regression to derive an equation for maintenance hours and costs. Data regarding the maintenance hours and costs for the last year and the results of the regression analysis follow:

Month Maintenance Cost Machine Hours
Jan. $ 4,200 480
Feb. 3,000 320
Mar. 3,600 400
Apr. 2,820 300
May 4,350 500
June 2,960 310
July 3,030 320
Aug. 4,470 520
Sept. 4,260 490
Oct. 4,050 470
Nov. 3,300 350
Dec. 3,160 340
Sum $ 43,200 4,800
Average $ 3,600 $ 400
Average cost per hour $ 9.00
a (intercept) $ 684.65
b (coefficient) 7.2884
Standard error of the estimate 34.469
R-squared 0.99724
t-value for b 60.105

If Armer Company uses the high-low method of analysis, the equation for the relationship between hours of activity and maintenance cost follows:

  • y = 570 + 9.0x

  • y = 400 + 9.0x

  • None of these answer choices are correct.

  • y = 3,600 + 400x

  • y = 570 + 7.5x

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