Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 46

Interpretation of Regression Results: Simple Regression

Your company provides a variety of delivery services. Management wants to know the volume of a particular delivery that would generate $10,000 per month in operating profits before taxes. The company charges $20 per delivery.

The controller’s office has estimated overhead costs at $9,000 per month for fixed costs and $12 per delivery for variable costs. You believe that the company should use regression analysis. Your analysis shows the results to be:

Monthly overhead = $26,501 + $10.70 per delivery

Your estimate was based on the following data:

Month	Overhead Costs	Number of Deliveries
1	$142,860	11,430
2	151,890	12,180
3	192,600	15,660
4	141,030	11,250
5	203,490	12,780
6	180,630	14,730
7	159,630	12,510
8	183,990	15,060
9	194,430	15,450
10	150,120	11,970
11	154,080	12,630
12	184,800	15,300
13	183,120	14,580

The company controller is somewhat surprised that the cost estimates are so different. You have been asked to recheck your work and see if you can figure out the difference between your results and the controller’s results.

Required

a. Analyze the data and your results and state your reasons for supporting or rejecting your cost equation.

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b. Write a report that informs management about the correct volume that will generate $10,000 per month in operating profits before taxes.

Step 1 of 2

a.?The first step in understanding the difference is to prepare a scattergraph of the data:

?Notice the one observation that appears to be unusual. (This is observation 5.) Without knowing more about the reasons for the high cost, we might want to treat it as an “outlier” meaning we would estimate the regression without this observation. The results of that regression are:

Regression Statistics
Multiple R	0.9921
R Square	0.9843
Adjusted R Square	0.9827
Standard Error	2635.7
Observations	12
	Coefficients
Intercept	$9776.56
Number of deliveries	$11.69

?These results are much closer to the controller’s estimates.