Cache Valley Bank is determining the feasibility of offering a new debit card to its customers, for which they expect to have a service charge of $.85 per transaction. The following cost estimates have been made assuming 100,000 transactions per year:
Direct labor $40,000 (5,000 estimated hours x $8.00 per hour)
Overhead costs have not yet been estimated for the new debit card, but annual data on total production and overhead costs for similar products have been analyzed using simple linear regression. The following results were derived from the simple regression and provide the basis for overhead cost estimates for the new debit card:
Required:
1) What percentage of the variation in overhead costs is explained by the independent variable?
2) What is the total estimated overhead cost for an estimated activity level of 5,000 direct-labor hours per year?
3) Will the $.85 per transaction charge cover the costs of direct labor and overhead, assuming 100,000 transactions per year?

Question

Cache Valley Bank is determining the feasibility of offering a new debit card to its customers, for which they expect to have a service charge of $.85 per transaction. The following cost estimates have been made assuming 100,000 transactions per year:
Direct labor $40,000 (5,000 estimated hours x $8.00 per hour)
Overhead costs have not yet been estimated for the new debit card, but annual data on total production and overhead costs for similar products have been analyzed using simple linear regression. The following results were derived from the simple regression and provide the basis for overhead cost estimates for the new debit card:
  Required:
1) What percentage of the variation in overhead costs is explained by the independent variable?
2) What is the total estimated overhead cost for an estimated activity level of 5,000 direct-labor hours per year?
3) Will the $.85 per transaction charge cover the costs of direct labor and overhead, assuming 100,000 transactions per year?

Quizplus · Accepted Answer

The Answer of Cache Valley Bank is determining the feasibility of offering a new debit card to its customers, for which they expect to have a service charge of $.85 per transaction. The following cost estimates have been made assuming 100,000 transactions per year:
Direct labor $40,000 (5,000 estimated hours x $8.00 per hour)
Overhead costs have not yet been estimated for the new debit card, but annual data on total production and overhead costs for similar products have been analyzed using simple linear regression. The following results were derived from the simple regression and provide the basis for overhead cost estimates for the new debit card:
  Required:
1) What percentage of the variation in overhead costs is explained by the independent variable?
2) What is the total estimated overhead cost for an estimated activity level of 5,000 direct-labor hours per year?
3) Will the $.85 per transaction charge cover the costs of direct labor and overhead, assuming 100,000 transactions per year?

Cache Valley Bank Is Determining the Feasibility of Offering a New