Question

on question chapter 5 probl 46P, there is a regression answer, but I was wondering how this was calculated with using what overhead costs and deliveries? the question states

Your company provides a variety of delivery services. Management wants to know the volume of a particular delivery that would generate $10,000 per month in operating profits before taxes. The company charges $20 per delivery.

The controller’s office has estimated overhead costs at $9,000 per month for fixed costs and $12 per delivery for variable costs. You believe that the company should use regression analysis. Your analysis shows the results to be:

Monthly overhead = $26,501 + $10.70 per delivery

Your estimate was based on the following data:

Month	Overhead Costs	Number of Deliveries
1	$142,860	11,430
2	$ 151,890	12,180
3	$192,600	15,660
4	$141,030	11,250
5	$203,490	12,780
6	$180,630	14,730
7	$159,630	12,510
8	$183,990	15,060
9	$194,430	15,450
10	$150,120	11,970
11	$154,080	12,630
12	$184,800	15,300
13	$183,120	14,580

so the regression results were

Multiple R	0.9921
R Square	0.9843
Adjusted R Square	0.9827
Standard Error	2635.7
Observations	12
	Coefficients
Intercept	$9776.56
Number of deliveries	$11.69 so what was calculated to get the regression results?

Answer 1

Solution:

Notice the one observation that appears to be unusual. (This is Observation 5). Without knowing more about the reasons for high cost, we might want to treat it as an “outlier” meaning we would estimate the regression without this observation. The results of that regression are:

Regression Statistics
Multiple R	0.9921
R Square	0.9843
Adjusted R Square	0.9827
Standard Error	2635.7
Observations	12
Coefficients
Intercept	$9,776.56
Number of deliveries	$11.69

These results are much closer to the controller’s estimates.

Using the results from the “improved” regression, the cost of equation for overhead costs can be written as:

Monthly overhead = $9,776.56 + $11.69 * Number of deliveries

This implies a contribution margin per delivery of $8.31 ($20.00 - $11.69)

To earn operating profits of $10,000, the company needs approximately $2,380 [($10000 - $9,776.56)/$8.31] deliveries.

Note, however, that this level of deliveries is outside the range of the observations used to develop the regression estimates. Therefore, this estimate needs to be used with caution.