Question
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:
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$2.00.
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$2.49.
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$3.40.
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$2.60.
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$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:
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y = 570 + 9.0x
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y = 400 + 9.0x
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None of these answer choices are correct.
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y = 3,600 + 400x
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y = 570 + 7.5x
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