Question
To estimate the costs for 2024, Pumpkin Imports needs to determine the variable utilities rate per machine hour. Management presented the following information for the
To estimate the costs for 2024, Pumpkin Imports needs to determine the variable utilities rate per machine hour. Management presented the following information for the year ended December 31, 2023. Machine Hours Utilities Cost January 3,400 11,250 February 4,900 12,120 March 3,000 10,200 April 5,000 12,000 May 3,100 10,500 June 4,800 11,990 July 3,200 11,200 August 4,200 11,700 September 4,700 12,005 October 3,500 11,300 November 5,200 12,550 December 3,200 12,200 Pumpkin estimates that it will produce 9,500 units in January. Each of these units requires 1.3 machine hours. Required: 1. High-low method: a. Calculate the variable and fixed components of the utilities cost. b. Create the cost equation based on the high-low method. c. Using the data calculated above, estimate the utilities cost for January. 2. Regression method: a. In Excel, run a regression analysis. Be sure to label and show the equation and Rsquared on the scatterplot. b. What is the cost equation? Based on that equation, what is the variable cost per unit and the total fixed costs? c. What does R-squared measure? Based on your R-squared, should you find a different cost driver than machine hours? d. Based on the cost equation with regression, estimate the utilities cost for January. (More on next page) 3. In addition, your manager has data based on direct labor hours. The data can be found below: Direct Labor Hours January 3,160 February 4,260 March 2,820 April 4,350 May 2,960 June 4,200 July 3,000 August 3,600 September 4,050 October 3,300 November 4,470 December 3,030 a. Run a regression analysis and find the cost equation. Be sure to label and show the equation and R-squared on the scatterplot. b. Make a prediction for January based on this equation. 4. Your manager is trying to determine the best way to estimate costs. Write a memo including the following information: a. Describe the difference between the high-low method and regression analysis. Which method generally will provide a better cost equation? Why? b. Discuss the two different cost drivers (machine hours and direct labor hours). How do the cost estimates differ? Which driver is a better predictor based on the calculations you have completed.
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