Mulvey Company derived the following cost relationship from a regression analysis of its monthly manufacturing overhead cost: C = $80,000 + $12M where: C = monthly manufacturing overhead cost and M = machine hours.The standard error of estimate of the regression is $6,000.The standard time required to manufacture one six-unit case of Mulvey's single product is four machine hours.Mulvey applies manufacturing overhead to production on the basis of machine hours,and its normal annual production is 50,000 cases.Mulvey's estimated variable manufacturing overhead cost for a month in which scheduled production is 5,000 cases would be:
A)$80,000.
B)$320,000.
C)$240,000.
D)$360,000.
E)Some amount other than those given above.

Question

Quizplus · Accepted Answer

The estimated variable manufacturing overhead cost for a month in which scheduled production is 5,000 cases can be calculated as follows:

Variable overhead cost per machine hour (from the regression analysis) = $12
Standard machine hours per case = 4
Therefore, variable overhead cost per case = $12 x 4 = $48

Estimated variable manufacturing overhead cost for 5,000 cases = $48 x 5,000 = $240,000

Since the question is asking for the estimated variable manufacturing overhead cost only, we do not need to include the fixed cost component ($80,000) from the regression equation. And since the standard error of estimate is given as $6,000, we can assume that the regression equation provides a reasonable estimate of the relationship between machine hours and manufacturing overhead costs.

Mulvey Company Derived the Following Cost Relationship from a Regression