The Wilhoit Company has observed that there is a linear relationship between indirect labor expense and direct labor hours. Data for direct labor hours and indirect labor expense for 18 months are given in the file P10_69.xlsx. At the start of month 7, all cost categories in the Wilhoit Company increased by 10%, and they stayed at this level for months 7 through 12. Then at the start of month 13, another 10% across-the-board increase in all costs occurred, and the company operated at this price level for months 13 through 18.
a. Plot the data. Verify that the relationship between indirect labor expense and direct labor hours is approximately linear within each six-month period. Use regression (three times) to estimate the slope and intercept during months 1 through 6, during months 7 through 12, and during months 13 through 18.
b. Use regression to fit a straight line to all 18 data points simultaneously. What values of the slope and intercept do you obtain?
c. Perform a price level adjustment to the data and re-estimate the slope and intercept using all 18 data points. Assuming no cost increases for month 19, what is your prediction for indirect labor expense if there are 35,000 direct labor hours in month 19?
d. Interpret your results. What causes the difference in the linear relationship estimated in parts b and c?