Interpretation of Regression Results: Simple Regression, Regression Problems Your company is preparing an estimate of its production costs for the coming period. The controller estimates that direct materials costs are $45 per unit and that direct labor costs are $21 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult.
The controllerÃ¢â¬â¢s ofÃ¯Â¬Âce estimated overhead costs at $3,600 for Ã¯Â¬Âxed costs and $18 per unit for variable costs. Your colleague, Lance, who graduated from a rival school, has already done the analysis and reports the Ã¢â¬ÅcorrectÃ¢â¬Â cost equation as follows:
OverheadÃÂ $10,600 + $16.05 per unitÃÂ ÃÂ
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Lance also reports that the correlation coefÃ¯Â¬Âcient for the regression is .82 and says, Ã¢â¬ÅWith 82 per cent of the variation in overhead explained by the equation, it certainly should be adopted as the best basis for estimating costs.Ã¢â¬ÂÃÂ ÃÂ When asked for the data used to generate the regression, Lance produces the following:
The company controller is somewhat surprised that the cost estimates are so different. You have therefore been assigned to check LanceÃ¢â¬â¢s equation. You accept the assignment with glee.
Analyse LanceÃ¢â¬â¢s results and state your reasons for supporting or rejecting his cost equation.