Question

Wallys Cross Country Adventures is recently preparing for its third year in business. Wally's was formed by Wally Glider in response to his frustration of affordable high quality skis for his Nordic skiing activities. Wally's was founded on the principles of developing durable high performing cross country skis for serious Nordic Skiers in the Rocky Mountain States. Wally has continually modified his production techniques and materials and has become a major niche competitor in the competition cross country ski market. Recently, Wally has decided he needs to develop a better understanding of his costs so that he can better plan and control his operations. Therefor, he has begun to more closely analyze his production and selling and distribution costs. Construction of competition cross country skis is a labor intensive operation and Wally has decided that he would use a regression model using labor hours to help him better understand his fixed and variable manufacturing overhead costs. Information resulting from a regression analysis using mostly data collected over the past 18 months with manufacturing overhead cots as the dependent variable and direct labor hours as the independent variable provided below: Intercept: 15460 Coefficient of the independent variable: 38.40 Standard error of the coefficient of the independent variable: 10.25 Coeffincient of correlation (r): 0.847 Coefficient of determination (r squared): 0.717 Direct costs associated with making the 3,000 pairs of cross country skis that Wally plans to produce during 2019 are as follows: Direct Materials: $330,000 (all variable) Direct Labor: $75,000 (the labor rate is $30/hour and direct labor is all variable) Additional costs and revenue information is as follows: The cross country skis are packages, shipped and sold for $350/pair. Wally has worked out a deal with a major shipping company to ship his skis anywhere in the continental United States for $26/pair. Wally has also estimated that all of his selling and administrative costs other than shipping is fixed and he estimated that is will be $200,000 for the year of 2019. Questions Required: 1.) Determine the t-value for the regression model? What does this imply about the model? 2.) What is the r squared for the regression model? What does this imply about the model? Regardless of your findings in parts 1 and 2 use the regression results along with all other relevant information in answering questions 3-6. 3.) What is the total estimated manufacturing overhead cost for a month when 210 direct labor hours are budgeted for production? 4.) what is the total estimated fixed costs per year for Wally's Cross Country Adventures? 5.) Determine the expected contribution margin for one pair of cross country skis. 6.) Determine the annual breakeven point in pairs of skis for Wally's cross country adventures assuming that all costs and the selling price are as budgeted.

Answer 1

The t statistic = coefficient / standard error.

Coefficient of the independent variable: 38.40

Standard error of the coefficient of the independent variable: 10.25

t- value for the regression model=38.40/10.25=3.746341

t-value measures of the precision with which the regression  coefficient is measured.

Coefficient of correlation=0.847

R squared of regression model=(0.847^2)= 0.717409

R-squared indicates how close the data are to the fitted regression line.

It indicates goodness of fit.

Intercept: 15460

Total estimated manufacturing overhead cost for a month=$15460

Total estimated fixed costs per year for Wally's Cross Country Adventures:

Manufacturing overhead for the month =$15460

Manufacturing overhead for theyear =$15460*12= $185520

Selling and administrative costs other than shipping is fixed = $200,000 for the year of 2019

Total Fixed cost per year=185520+200000= $ 385,520

Unit direct material cost	$110.00	(330000/3000)
Unit direct labor cost	$25.00	(75000/3000)
Unit shipping cost	$26
Unit Variable cost	$161
Unit Selling cost	$350
Unit contribution margin	$189	(350-161)

Annual Break even point in units

2040

(385580/189)