The Armer Company is accumulating data to be used in preparing its annual profit

Question

The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows:

     

     

  

Based upon the data derived from the regression analysis, 420 maintenance hours in a month would mean the maintenance costs would be budgeted at: (rounded to the nearest whole dollar)

Hours of Activity Maintenance Costs   January 440              $ 3,900                February 320              2,500                March 370              3,000                April 350              2,900                May 550              4,330                June 330              2,710                July 340              3,520                August 470              4,770                September 520              4,230                October 520              4,460                November 380              3,200                December 380              3,550                Sum 4,970              43,070                Average 414              3,589             

Explanation / Answer

Hours of Activity x Maintenance Costs y x^2 y^2 XY January 440 $3,900 193600 15210000 $1,716,000 February 320 2,500 102400 6250000 $800,000 March 370 3,000 136900 9000000 $1,110,000 April 350 2,900 122500 8410000 $1,015,000 May 550 4,330 302500 18748900 $2,381,500 June 330 2,710 108900 7344100 $894,300 July 340 3,520 115600 12390400 $1,196,800 August 470 4,770 220900 22752900 $2,241,900 September 520 4,230 270400 17892900 $2,199,600 October 520 4,460 270400 19891600 $2,319,200 November 380 3,200 144400 10240000 $1,216,000 December 380 3,550 144400 12602500 $1,349,000 Total 4970 43070 2132900 160733300 18439300 n 12 Total of X 4970 Total of Y 43070 Total of X^2 2132900 Total of xy 18439300 Calculating Average Variable cost per unit b 12*18439300-4970*43070/12*2132900-(4970)^2 8.07 Calculating the total fixed Cost a (43070-(8.07*4970))/12 246.84 The cost volume formula y a+bx y 246.84+(8.07*420) 3636 $ estimated cost

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