Question

A leading manufacturing company has 2 main product lines, Traditional and Modern with unit sales prices for $340 and $440 respectively. Manufacturing overhead are applied as $544.025 per direct labor hour.

	Traditional	Modern	Total
Sales in units	10000	10000	20000
Beginning finished goods	$        480,000.00	$         600,000.00	$ 1,080,000.00
Direct Material	$     2,000,000.00	$     3,500,000.00	$ 5,500,000.00
Direct Labor	$        370,370.00	$         185,186.00	$    555,556.00
Ending Finished Goods	$        480,000.00	$         600,000.00	$ 1,080,000.00

Overhead breakdown in percentage
Machining	52.02%
Assembly	26.59%
Material Handling	6.94%
Inspection	14.45%
Total	100.00%

	Products
Cost Pool for 2018	Traditional	Modern
Direct Labor Hours	2000	1000
Machine Hours	30000	60000
Assembly Hours	12000	11000
Material Handling Parts	10	20
Inspection Hours	1000	1500

Projections 2019	Products
Ending Inventory in Dollars	$        260,000.00	$         440,000.00
Sales in Units	10200	9800

Material, Labors and overhead are expected to increase by 10% each in 2019

Unit sales prices for both products are expected to increase by $10 each in 2019

Percentage of overhead remains the same in 2019.

The cost drivers units are staying the same in 2019.

There are two clients with special orders for Traditional. The two clients ordered the same number of units.

You tracked their COGS by their extra number of specifications per month in 2018.

Client one in 2018	# of specifications	COGS
Jan	85	$           45,000.00
Feb	65	$           32,000.00
Mar	110	$           55,000.00
Apr	160	$           78,000.00
May	65	$           36,000.00
Jun	37	$           34,000.00
Jul	29	$           19,000.00
Aug	37	$           21,000.00
Sep	68	$           39,000.00
Oct	81	$           51,000.00
Nov	48	$           36,000.00
Dec	124	$           74,000.00
Total	909	$         520,000.00

Client two in 2018	# of specifications	COGS
Jan	75	$           25,000.00
Feb	55	$           15,000.00
Mar	120	$           45,000.00
Apr	150	$           60,000.00
May	55	$           30,000.00
Jun	34	$           25,000.00
Jul	27	$           15,000.00
Aug	33	$           20,000.00
Sep	61	$           35,000.00
Oct	77	$           45,000.00
Nov	42	$           25,000.00
Dec	116	$           60,000.00
Total	845	$         400,000.00

Calculate the fixed cost and variable cost components of COGS for the two clients using the lease squares regression method. Show your work and write out the regression model equations for each client.

Discuss the two clients COGS in terms of fixed cost and variable cost according to special specifications.

Answer 1

Based on the results of regression analysis, the intercept part of the regression equation represent the fixed cost and the slope indicates the variable cost

Client 1 COGS: Fixed cost = 9134.48, Variable cost = 451.47

Client 2 COGS: Fixed cost = 7907.28, Variable cost = 361.08