High-Low, Scattergraph, and Regression Analysis; Manufacturing Company. Kitchen Inc., produces kitchen counter tops. Manufacturing overhead costs tend to fluctuate from one month to the next, and management would like to accurately estimate these costs for planning and decision-making purposes.The accounting staff at Kitchen Products recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff believes the best starting point is to review historical data for costs and machine hours:
| Reporting Period (Month) |
Total Costs |
Machine Hours |
| January |
$278,000 |
1,550 |
| February |
280,000 |
1,570 |
| March |
266,000 |
1,115 |
| April |
290,000 |
1,700 |
| May |
262,000 |
1,110 |
| June |
269,000 |
1,225 |
| July |
275,000 |
1,335 |
| August |
286,000 |
1,660 |
| September |
250,000 |
1,000 |
| October |
253,000 |
1,020 |
| November |
260,000 |
1,025 |
| December |
281,000 |
1,600 |
These data were entered into a computer regression program, which produced the following output:
| Coefficients |
| y-intercept |
210,766 |
| x variable |
45.31 |
Required:
A. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
B. Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
C. Use the regression output given to develop the cost equation Y = f + vX by filling in the dollar amounts for fand v.
D. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 1,300 machine hours. (You will have three different answers-one for each method.) Which approach do you think is most accurate and why?
E. Management likes the regression analysis approach and asks you to estimate costs for 5,000 machine hours using this approach (the company plans to expand by opening another facility and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.