Cost Estimation Methods

Review Problem 5.5

Alta Production, Inc., reported the following production costs for the 12 months January through December. (These are the same data that appear in Note 5.17 "Review Problem 5.3" and Note 5.19 "Review Problem 5.4".)
Reporting Period (Month) Total Production Cost Level of Activity (Units Produced)
January $460,000 300
February 300,000 220
March 480,000 330
April 550,000 390
May 570,000 410
June 310,000 240
July 440,000 290
August 455,000 320
September 530,000 380
October 250,000 150
November 700,000 450
December 490,000 350

Regression analysis performed using Excel resulted in the following output:

Coefficients
y-intercept 703
x variable 1,442.97
  1. Using this information, create the cost equation in the form \(Y = f + vX\).
  2. Assume Alta Production, Inc., will produce 400 units next month. Calculate total production costs for the month.

Solution to Review Problem 5.5

  1. The cost equation using the data from regression analysis is:
    \(Y\) = $703 + $1,442.97 \(X\)

  2. Using the equation, simply substitute 400 units for X, as follows:
    \(Y\) = $703 + ($1,442.97 x 400 units)
    \(Y\) = $703 + $577,188
    \(Y\) = $577,891

    Thus total production costs are expected to be $577,891 for next month.