An important application of regression analysis in accounting is in the estimation of cost. By collecting data on volume and cost and using the least squares method to develop an estimated regression equation relating volume and cost, an accountant can estimate the cost associated with a particular manufacturing volume. Consider the following sample of production volumes and total cost data for a manufacturing operation.
| Production Volume (units) | Total Cost ($) |
| 400 | 4,000 |
| 450 | 5,000 |
| 550 | 5,400 |
| 600 | 5,900 |
| 700 | 6,400 |
| 750 | 7,000 |
b1=
b0=
y1= _____ + ______x
b. What is the variable cost per unit?
r2=
What percentage of the variation in total cost can be explained by the production volume?
The company's production schedule shows 500 units must be produced next month. What is the estimated total cost for this operation (to the nearest whole number
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ABC company is considering producing a new range of smartphones that will require it to build a new factory. Feasibility studies have been done on the factory which cost $5 million. The studies have found the following:
1. The factory will cost $25 million and will have a useful life of 20 years.
2. The land where the factory will go is currently used as a carpark for workers and it is assumed that the company will have to pay $200000 per year for their workers to park in a nearby carpark.
3. The factory will be depreciated on a straight line basis and will have a salvage value of $0 but it is believed that most of it can be sold for scrap after 20 years for $50000.
4. Due to the nature of the business they are in, they will have to perform some environmental tests to make sure that some of the chemicals they are using are not entering the ground water around the factory. These tests will be performed every 5 years and cost $625000.
5. Through the building of this factory and the selling of the phones it produces, it’s revenue will increase by $5 million in year 1 and remain at this level for the operational life of the factory.
6. The extra costs that the company accrues per year due to the project are $435000 for labour, $50000 for overhead like power and water bills and marketing costs for the new line of phones will be $500000 per year but will decrease by $15000 per year as the phone gains greater penetration.
7. The company’s current cost of capital is 8% per year.
8. The tax rate is 30%.
9. The project requires an initial investment in working capital of $1000000 that is returned in year 20.
Calculate the break even point for the following variables:
a. The cost of capital.
b. The yearly revenue.
c. The labour cost.
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