346 High-Low, Regression Analysis On November 15, 2009, Sandra Cook, a newly hir
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Question
346 High-Low, Regression Analysis On November 15, 2009, Sandra Cook, a newly hired cost analyst at Peterson Company, was asked te predict overhiead costs for the company's operations in 2010, when 530 units are expected to be produced She collected the following quarterly data: Quarter 1/06 Overhead Costs $ 715 Production in Units 76 640 1,124 133 122 125 995 1,105 1,113 1,036 982 1,060 990 951 829 1,044 985 2/07 3/07 4/07 130 121 126 112 81 81 119 87 2/08 1/09 2/09 sing the high-low method to estimate costs, prepare a prediction of overhead costs for 2010 2. Sandy ran a regression analysis using the data she collected. The result was Y $347 $5.76 X Using this cost function, predict overhead costs for 2010. 3 Which prediction do you prefer? Why?Explanation / Answer
Year
(A): Total units
(B): Overhead costs
Average overhead costs (A/B)
2006
350
3188
9.1085714
2007
499
4249
8.5150301
2008
440
3983
9.0522727
2009
287
2858
9.9581882
High is in 2009
9.96
Low in 2007
8.51
Average (9.96+8.51)/2
9.235
Prediction of overhead cost for 2010
Expected units
530
Average (9.96+8.51)/2
9.235
Overhead costs (530 x 9.235)
4894.55
According to the regression equation ($347 + $5.76 x)
The overhead costs for 2010
($347 + $5.76 x 530)
Overhead costs
3399.8
Prediction as per the average method of high and low of average overhead costs is preferable. It is because it seems that the regression analysis would result in low estimation of overhead costs for 2010 with overhead costs of $3,399.80.
Thus, the expected overhead costs of $4894.55 is much more in line with the practical reality of overhead costs of the company.
Year
(A): Total units
(B): Overhead costs
Average overhead costs (A/B)
2006
350
3188
9.1085714
2007
499
4249
8.5150301
2008
440
3983
9.0522727
2009
287
2858
9.9581882
High is in 2009
9.96
Low in 2007
8.51
Average (9.96+8.51)/2
9.235
Prediction of overhead cost for 2010
Expected units
530
Average (9.96+8.51)/2
9.235
Overhead costs (530 x 9.235)
4894.55
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