Woodstock Company is planning to introduce a new product that will sell for $12

Question

Woodstock Company is planning to introduce a new product that will sell for $12 a unit. The following manufacturing cost estimates have been made on 100,000 units to be produced the first year.

Direct materials                     $100,000

Direct labour costs                $80,000 (the wage rate is $8 an hour x 10,000 labour hours)

Manufacturing overhead costs have not yet been estimated for the new product, but monthly data on total production and overhead costs for the past 24 months have been analysed using simple linear regression. The following results were derived from simple regression and provided the basis for overhead cost estimates for the new product. The coefficient of independent variable represents the variable overhead rate. The cost driver for variable overhead is direct labour hours.

Simple Regression Analysis Results

Dependent variable – Factory overhead costs

Independent variable – Direct labour hours

Computed values

            Intercept                                                        $120,000

            Coefficient of independent variable                       $6.40

            Coefficient of correlation                              0.958

            Coefficient of determination                        0.918

The total overhead cost for an estimated activity level of 20,000 direct labour-hours is

            A. $110,000

            B. $120,000

            C. $164,000

            D. $238,000

            E. $248,000

Explanation / Answer

Total overhead cost for an estimated activity level of 20,000 direct labour-hours = 120000+(20000*6.40) = $248000 Option E is correct

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