Question: Cost-volume-profit and regression analysis. Relling Corporation manufactures a drink bottle, model CL24. During 2017, Relling produced 210,000 bottles at a total cost of $808,500. Kraff Corporation has offered to supply as many bottles as Relling wants at a cost of $3.75 per bottle. Relling anticipates needing 225,000 bottles each year for the next few years.
1. a. What is the average cost of manufacturing a drink bottle in 2017? How does it compare to Kraff's offer?
b. Can Relling use the answer in requirement 1a to determine the cost of manufacturing 225,000 drink bottles? Explain.
2. Relling's cost analyst uses annual data from past years to estimate the following regression equation with total manufacturing costs of the drink bottle as the dependent variable and drink bottles produced as the independent variable:
y = $445,000 + $1.75X
During the years used to estimate the regression equation, the production of bottles varied from 200,000 to 235,000. Using this equation, estimate how much it would cost Relling to manufacture 225,000 drink bottles. How much more or less costly is it to manufacture the bottles than to acquire them from Kraff?
3. What other information would you need to be confident that the equation in requirement 2 accurately predicts the cost of manufacturing drink bottles?