Question

Using Multiple Regression Results to Construct and Apply a Cost Formula

The controller for Dohini Manufacturing Company felt that the number of purchase orders alone did not explain the monthly purchasing cost. He knew that nonstandard orders (for example, one requiring an overseas supplier) took more time and effort. He collected data on the number of nonstandard orders for the past 12 months and added that information to the data on purchasing cost and total number of purchase orders.

Month      Purchasing Cost      Number of Purchase Orders      Number of Nonstandard Orders
January      $18,860 370       53
February      18,065 330       35
March      19,250 370       61
April      18,050 410       14
May      19,345 400       73
June      19,500 450       55
July      19,670 460       30
August      20,940 560       80
September      19,430 440       51
October      20,020   500       50
November      18,800 470       12
December      19,340 480       27
Multiple regression was run on the above data; the coefficients shown by the regression program are:

Intercept   14,490 (rounded to the nearest dollar)
X variable 1   8.8 (rounded to the nearest cent)
X variable 2   20.37 (rounded to the nearest cent)
Required:

1. Construct the cost formula for the purchasing activity showing the fixed cost and the variable rate.

$fill in the blank 1
+   ($fill in the blank 2
× Purchase orders)   +   ($fill in the blank 3
× Nonstandard orders)
2. If Dohini Manufacturing Company estimates that next month will have 430 total purchase orders and 45 nonstandard orders, what is the total estimated purchasing cost for that month? (Round your answer to the nearest dollar.)

$fill in the blank 4
3. What if Dohini Manufacturing wants to estimate purchasing cost for the coming year and expects 5,340 purchase orders and 600 nonstandard orders?

What will estimated total purchasing cost be? (Round your answer to the nearest dollar.)

$fill in the blank 5
What is the total fixed purchasing cost?

$fill in the blank 6
Why doesn't it equal the fixed cost calculated in Requirement 2 above?

Answer 1

1.

Where,

Y = Total purchasing cost

F = Fixed purchase cost - $14,460

= Variable cost per Purchase order - $8.92

= Variable cost per Nonstandard order - $20.39

= Number of Purchase orders

= Number of Nonstandard orders

2.

.X₁ = 430, X₂ = 45

Fixed purchase cost = 12*$14,140 = $173,520

Total Purchase cost = $14,460 + $8.92*430 + $20.39*45

= $14,460 + $3,835.60 + $917.55

= $19,213.15

3

.X₁ = 5,340, X₂ = 580

Fixed purchase cost = 12*$14,140 = $173,520

Total Purchase cost - $173,520 + $8.92*5,340 + $20.39*580

= $173,520 + $47,632.8 + $11,826.2

= $232,979

it not equal because it calculated for 12 months whereas in requirement it calculated for a month