I got the first question. I am having trouble on questions 2-6. The answer for w
ID: 3119385 • Letter: I
Question
I got the first question. I am having trouble on questions 2-6.
The answer for what regression equation to use for Question 1 is:
Overhead = 1,732.06012 + 81.92799 * Number of Setups + 4.21711 * Machine Hours
Sorrentino Company
Sorrentino Company, which has been in business for one year, manufactures specialty Italian pastas. The pasta products start in the mixing department, where durum flour, eggs, and water are mixed to form dough. The dough is kneaded, rolled flat, and cut into fettucine or lasagna noodles, then dried and packaged.
Paul Gilchrist, controller for Sorrentino Company, is concerned because the company has yet to make a profit. Sales were slow in the first quarter but really picked up by the end of the year. Over the course of the year, 717,500 boxes were sold. Paul is interested in determining how many boxes must be sold to break even. He has begun to determine relevant fixed and variable costs and has accumulated the following per unit data:
Price $0.95
Direct materials 0.35
Direct labor 0.25
He has had more difficulty separating overhead into fixed and variable components. In examining overhead-related activities, Paul has noticed that machine hour appear to be closely correlated with units in that 100 boxes of pasta can be produced per machine hour. Setups are important batch-level activity. Paul also thinks that indirect labor hour may be associated with the overhead expense, but there is no evidence showing the relation. Currently, indirect labor hour is scheduled to be 2000 hours per year. Paul has accumulated the following information on overhead costs, number of setups, machine hours, and indirect labor hours for the past 12 months. Month
Overhead
Number of Setups
Machine Hours
Indirect Labor Hours
January
$5,700
18
595
155
February
4,500
6
560
135
March
4,890
12
575
125
April
5,500
15
615
200
May
6,320
20
680
240
June
5,100
10
552
183
July
5,532
16
630
205
August
5,409
12
600
115
September
5,300
11
635
162
October
4,950
12
525
145
November
5,350
14
593
185
December
5,600
14
615
150
Selling and administrative expenses, all fixed, amounted to $200,000 last year.
In the second year of operations, Sorrentino Company has decided to expand into the production of sauces to top its pastas. Sauces are also started in the mixing department, using the same equipment. The sauces are mixed, cooked, and packaged into plastic containers. One jar of sauce is priced at $2 and required $0.65 of direct materials and ACC320 Group Project 1—CVP and Regression Analysis
$0.45 of direct labor. 60 jars of sauce can be produced per machine hour. The production manager believes that with careful scheduling, he can keep the total number of setups and total number of indirect labor hours (for both pasta and sauce) to the same number as used last year. The marketing director expects to increase selling expense by $30,000 per year to promote the new product and believes Sorrentino Company can sell three boxes of pasta for every one jar of sauce.
Required:
1. Separate overhead into fixed and variable components using regression analysis. Run seven regressions by using different combinations of three independent variables: number of setups, machine hours, and indirect labor hours. These seven regressions are: a) three simple regressions; b) three multiple regressions using two independent variables; c) multiple regression using all independent variables. Which regression equation is the best? Why?
Now, the best regression equation is chosen, use it to answer the following questions:
2. Calculate the number of boxes of pasta which must be sold to break even before the expansion into the production of sauces.
3. Now consider the production of sauces, calculate the break-even number of boxes of pasta and jars of sauce.
4. Suppose that the production manager is wrong and that the number of setups doubles. Calculate the new break-even number of boxes of pasta and jars of sauce.
5. Refer to the original data. Suppose that only 40 jars of sauce can be produced per machine hour and that Sorrentino Company will sell two boxes of pasta for every one jar of sauce. Calculate the new break-even number of boxes of pasta and jars of sauce.
6. Comment on the effects of the shift in sales mix and uncertainty in the cost estimation on the break-even points for Sorrentino Company.
He has had more difficulty separating overhead into fixed and variable components. In examining overhead-related activities, Paul has noticed that machine hour appear to be closely correlated with units in that 100 boxes of pasta can be produced per machine hour. Setups are important batch-level activity. Paul also thinks that indirect labor hour may be associated with the overhead expense, but there is no evidence showing the relation. Currently, indirect labor hour is scheduled to be 2000 hours per year. Paul has accumulated the following information on overhead costs, number of setups, machine hours, and indirect labor hours for the past 12 months. Month
Overhead
Number of Setups
Machine Hours
Indirect Labor Hours
January
$5,700
18
595
155
February
4,500
6
560
135
March
4,890
12
575
125
April
5,500
15
615
200
May
6,320
20
680
240
June
5,100
10
552
183
July
5,532
16
630
205
August
5,409
12
600
115
September
5,300
11
635
162
October
4,950
12
525
145
November
5,350
14
593
185
December
5,600
14
615
150
Explanation / Answer
Price of one box of pasta = $0.95
Direct labour cost per box of pasta = $0.25
Direct material cost per box of pasta = $0.35
Total fixed cost per box of pasta = $0.95-$0.25-$0.35 = $0.35
Total Overheads incurred in the year = $5700+$4500+$4890+$5500+$6320+$5100+$5532+$5409+$5300+$4950+$5350+$5600 = $64151
Selling and Administrative expenses for the year = $200000
Total Fixed expenses incurred last year = $64151+$200000 = $264151
Break Even for pastas will be after sale of $264151/$0.35 = 754717.14 = 754717 boxes
Total number of machine hours available in the year = 7175 hours (By adding all the machine hours every month)
Now we have to determine how many sauces packets and how many boxes of pastas should be manufactured in the year . Let number of hours for packets of sauces production are represented by A and number of hours for boxes of pasta production are represented by B . Now let us convert into an equation :
B + A = 7175
We are given that the company can sell 3 boxes of pasta for every one packet of sauce so we have
(B*60)/(A*100)=1/3
B/A=100/180=5/9
B= 5A/9
A= 9B/5
Equating this in first equation
B+ 9B/5 = 7175
14B = 7175*5
B = 35875/14 = 2562.5 Hours
A = 7175-2562.5 = 4612.5 Hours
Number sauce packets = 2562.5 * 60 = 153750
Number of pasta boxes = 4612.5 *100 = 461250
Total fixed cost incurred will be
461250*0.35 + 153750*(2-0.65-0.45) = 161437.5 + 138375 = 299812.5 $
461250+153750 =615000 total number of boxes of pastas and packets of sauce so
So fixed cost per set of pasta and sauce = $299812.5/615000 = $0.4875
Overheads = $64151
Selling and administration expenses = $200000+$30000 = $230000
Total fixed expenses = $64151+$230000 = $294151
So break even will be achieved by selling = 294151/ 0.4875 = 603386.667 sets
Packets of sauce = 603386.667 * 25/100 = 150846.667 = 150847
Boxes of pasta = 603386.667 *75/100 = 452540
Now if the number of set ups double from 160 to 320 new overhead cost will be (through regression equation given above)
1,732.06012 + 81.92799 * 320 + 4.21711 * 7175 = 1732.06012 + 26216.9568 + 30257.76 = 58206.7769 = $58207
So in first case where 60 packets of pasta were produced total fixed expenses will be
=200000 + 58207 = 258207 $ and break even will be achived after production of = 258207 / 0.4875 = 529665.4 sets of pasta & sauce and that means 529665.4*(75/100) = 397249 boxes of pasta and 529665.4*(25/100) = 132416 packets of pasta
Now if only 40 jars can be produced per machine hour and company can sell only 2 boxes of pasta for every one packet of sauce the calcultaion will be as follows :
(B*40)/(A*100) = 1/2
B/A = 100/80 = 5/4
A = 4B/5
B + 4B/5 = 7175
9B/5 = 7175
B = 7175*5/9 = 3986.11 Hours
A = 7175-3986.11 = 3188.88 Hours
Number packets of sauce will be 3986.11*40 = 159444
Number of boxes of pasta will be 3188.88*100 = 318888
Total number of packets of sauce and boxes of pasta will be = 159444 + 318888 = 478332
% age of packets of sauce = (159444 / 478332)*100 = 33.34
% age boxes of pasta = (318888/ 478332)*100 = 66.668
Total Fixed cost incurred on sauce and pasta = 318888*0.35 + 159444*(2-0.65-0.45) = 111610.8+ 143499.6 = 255110.4 $
Total fixed cost incurred per set of sauce and pasta = 255110.4/478332 = 0.533 $
Total fixed expenses = 294151 $
Break even will be achieved = 294151/0.533 = 551878.049 = 551878 sets of pasta and sauce
So no. of packets of sauce will be = 551878*(33.34/100) = 183996
And boxes of pasta will be = 551878*(66.66/100) = 367882
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