Balcom Enterprises is planning to introduce a new product that will sell for $120 per unit. Manufacturing cost estimates for 28,000 units for the first year of production are: Direct materials $1,372,000. Direct labor $630,000 (based on $18 per hour × 35,000 hours). Although overhead has not be estimated for the new product, monthly data for Balcom's total production for the last two years has been analyzed using simple linear regression. The analysis results are as follows: Dependent variable Factory overhead costs Independent variable Direct labor hours Intercept $ 136,000 Coefficient on independent variable $ 5.00 Coefficient of correlation 0.959 R2 0.846 Based on this information, what percentage of the variation in overhead costs is explained by the independent variable?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Balcom Enterprises is planning to introduce a new product that will sell for $120 per unit. Manufacturing cost estimates for 28,000 units for the first year of production are:
- Direct materials $1,372,000.
- Direct labor $630,000 (based on $18 per hour × 35,000 hours).
Although overhead has not be estimated for the new product, monthly data for Balcom's total production for the last two years has been analyzed using simple linear regression. The analysis results are as follows:
| Dependent variable | |||
| Independent variable | Direct labor hours | ||
| Intercept | $ | 136,000 | |
| Coefficient on independent variable | $ | 5.00 | |
| Coefficient of correlation | 0.959 | ||
| R2 | 0.846 | ||
Based on this information, what percentage of the variation in overhead costs is explained by the independent variable?
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