PROBLEM 2A–4 Least-Squares Regression; Scattergraph; Comparison of Activity Bases[LO3, LO8]The Hard Rock Mining Company is developing cost formulas for management planning and decision-making purposes. The company’s cost analyst has concluded that utilities cost is a mixed cost, and he is attempting to find a base with which the cost might be closely correlated. The con- troller has suggested that tons mined might be a good base to use in developing a cost formula. The production superintendent disagrees; she thinks that direct labor-hours would be a better base. The cost analyst has decided to try both bases and has assembled the following information:
|
First . . . . . . . . . . . . . . . . . . . |
18,000 |
10,000 |
$100,000 |
|
Second . . . . . . . . . . . . . . . . |
25,000 |
9,000 |
$105,000 |
|
Third . . . . . . . . . . . . . . . . . |
30,000 |
8,000 |
$85,000 |
|
Fourth . . . . . . . . . . . . . . . . |
28,000 |
11,000 |
$120,000 |
Required:
1. Using tons mined as the independent (X) variable:
a. Determine a cost formula for utilities cost using the least-squares regression method.
b. Prepare a scattergraph and plot the tons mined and utilities cost. (Place cost on the verti- cal axis and tons mined on the horizontal axis.) Fit a straight line to the plotted points using the cost formula determined in (a) above.
2. Using direct labor-hours as the independent (X) variable, repeat the computations in (a) and
(b) above.
3. Would you recommend that the company use tons mined or direct labor-hours as a base for planning utilities cost?
