Lawrence Choynski, the plant controller at Bart Plastics, wants to identify cost drivers for manufacturing overhead costs. Indirect support consists of skilled staff responsible for the efficient functioning of all aspects (setup, production, maintenance, and quality control) of the plastic injection molding facility. In talking with the support staff, Choynski has the impression that the staff spends a sizable portion of its time ensuring that the equipment is set up correctly and checking that the first units of production in each batch are of good quality.
Choynski has collected the following data for the past 12 months:
Choynski estimates the Following two regression equations:
y = $28,089 + (s10.23 x Machine-hours)
y = $16,031 + ($197.30 x Number ot batches)
where y is the monthly manufacturing overhead costs.
Required:
1. Plot the monthly data and the regression lines for each of the following cost functions:
a. Manufacturing overhead costs = a (b x Machine-hours)
b. Manufacturing overhead costs = a (b x Number of batches)
Which cost driver for manufacturing overhead costs would you choose? Explain.
2. Choynski anticipates 2,600 machine-hours and 300 batches for next month.
Using the cost driver you chose in requirement 1, what amount of manufacturing overhead costs should Choynski budget?
3. Assume the facts in requirement 2. Choynski adds 20% to costs to determine target revenues (and hence selling prices). Costs other than manufacturing overhead are expected to be $125,000 next month. Compute the target revenue numbers for next month if the cost driver for manufacturing overhead is
i) machine-hours and
ii) number of batches.
What would happen it Choynski set target revenues and selling prices using the cost driver you did not choose in requirement 1?