Question

In: Accounting

SHATTA MOVEMENT Ltd produces a single product. The company’s directors want to explore new markets, and...

  1. SHATTA MOVEMENT Ltd produces a single product. The company’s directors want to explore new markets, and they require an accurate analysis of the firm’s cost structure for both forecasting and pricing purposes. An attempt to provide this analysis from the aggregation of individual costs has produced a poor correspondence between actual and predicted costs. You are an accountant employed by SHATTA MOVEMENT Ltd, and you have been asked to provide a statistical approach to the problem. The financial director has given you the following data:

Period

Output (units)

Average unit cost (GHS)

July

9,000

12.8

August

14,000

13

September

11,000

11.4

October

8,000

12

1November

6,000

13

December

12,000

11.7

You obtain the following further information:

  • The costs from which the averages have been computed consist of the firm’s entire costs for the relevant month.
  • Fixed costs can be assumed to be unaffected by seasonal factors except for harmattan heating. In July and August a supplementary heating system was employed; this cost GHS 10,000 per month to operate.

Required:

Estimate SHATTA MOVEMENT Ltd.’s normal fixed and variable cost of production using linear regression.

Solutions

Expert Solution

Period

Output (units)

(a)

Avg. Unit cost (b) Total cost c=a*b Heating system cost (d)

Total Cost excluding heating system cost

e=c-d

July 9000 12.8 115200 10000 105200
August 14000 13 182000 10000 172000
September 11000 11.4 125400 125400
October 8000 12 96000 96000
November 6000 13 78000 78000
December 12000 11.7 140400 140400

To conduct linear regresssion analysis take ouptut units and total cost excluding heating system cost values.

Output Unit Total Cost excluding Heating system
9000 105200
14000 172000
11000 125400
8000 96000
6000 78000
12000 140400

I have done linear regression using excel and picture of that result is attached with this solution.

Variable cost per unit = 11.55

Fixed cost = 4023.81


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