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The good fit indicates a strong relat ionship between

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Unformatted text preview: ically plausible? For example, is the quantit y of bic ycles made the only cost driver or are there other cost­drivers (for example batch­level costs of setups, production­orders or material handling) that affect manufacturing costs? b. How good is the goodness o f fit ? That is, how well does the est imated line fit the data? c. Is the relat ionship between the number o f bicycle frames produced and total manufacturing costs linear? d. Does the slope of the regressio n line indicate that a strong relat ionship exists between manufacturing costs and the number of bicycle frames produced? e. Are there any data problems such as, for example, errors in measuring costs, trends in prices o f materials, labor or overheads that might affect variable or fixed costs over time, extreme values of observat ions, or a nonstationary relat ionship over time between total manufacturing costs and the quant it y of bicycles produced? f. How is inflat ion expected to affect costs? g. Will Ryan supply high­qualit y bicycle frames on time? 10­13 10­27 (25 min.) Regression analysis, service company. 1. Solution Exhibit 10­27 plots the relationship between labor­hours and overhead costs and shows the regressio n line. y = $48,271 + $3.93 X Economic plausibility. Labor­hours appears to be an econo mically plausible driver o f overhead costs for a catering company. Overhead costs such as scheduling, hiring and training o f workers, and managing the workforce are largely incurred to support labor. Goodness of fit The vert ical differences between actual and predicted costs are extremely small, indicat ing a very good fit. The good fit indicates a strong relat ionship between the labor­ hour cost driver and overhead costs. Slope of regression line. The regressio n line has a reasonably steep slope fro m left to right. Given the small scatterof the observat ions around the line, the posit ive slope indicates that, on average, overhead costs increase as labor­hours increase. 2. The regressio n analysis indicates that, within the relevant range of 2,500 to 7,500 labor­ hours, the variable cost per person for a cocktail party equals: Food and beverages Labor (0.5 hrs. ´ $10 per hour) Variable overhead...
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