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QM 670 Exam I – Fall 2017
This exam is worth 80 points. The first three items have four parts. Each part is worth six points. The final two items are worth three points each. (Two points are free.)
- The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. They have debated whether the power cost should be treated as fixed, variable, or both. Using the following data you are charged to settle this issue and determine the best cost formula for Wheeler.
| Quarter | Machine Hrs. | Power Cost |
| 1 | 20000 | 26000 |
| 2 | 25000 | 38000 |
| 3 | 30000 | 42500 |
| 4 | 22000 | 37000 |
| 5 | 21000 | 34000 |
| 6 | 18000 | 29000 |
| 7 | 24000 | 36000 |
| 8 | 28000 | 40000 |
- Find the estimated fixed cost associated with the machine hours.
- Find the estimated variable cost associated with the machine hours.
- Discuss your confidence in the use of these estimates.
- Would you recommend using this cost function? Explain.
Solution Preview
1.a.Estimated fixed cost associated with machine hours; For this we need a simple linear regression equation where the power cost will be the dependent variable while the machine hours will be the explanatory variable, therefore, the equation will be;
Powercost = 6899.7845 + 1.2091machinehrs ; from this equation our fixed cost will therefore be 6899.7845Ans. Results of the analysis is as shown in table 4.0
Table 4.0
Coefficients Estimate Std.Error Pr(>|t})
Intercept 6899.7845 5910.3877 0.28734
Machine hrs 1.2091 0.2483 0.00279
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