Green Care Limited GCL manufactures environmentally friendly electric lawn mowers
Green Care Limited (GCL) manufactures environmentally friendly electric lawn mowers, and demand has been growing rapidly. Management would like to develop cost formulas for planning and decision making. The company’s cost analyst has concluded that utilities cost is a mixed cost, and she is attempting to find an activity base with which the cost might be closely related. The controller has suggested that units produced might be a good base to use in developing a cost formula. The production superintendent disagrees; he thinks that direct labour-hours would be a better base since different lawn mower models have different production requirements. The cost analyst has decided to try both bases and has assembled the following information for the past eight months:
1. Using units produced as the independent (X) variable:
a. Determine a cost formula for utilities cost using the least-squares regression method.
b. Prepare a scattergram and plot the units produced and utilities cost. (Plot cost on the vertical axis and units produced on the horizontal axis.) Fit a straight line to the plotted points using the cost formula determined in (a) above.
2. Using direct labour-hours as the independent (X) variable, repeat 1(a) and (b) above.
3. Would you recommend that the company use units produced or direct labour-hours as a base for planning utilities cost?
4. Evaluate the economic plausibility of using units produced or direct labour-hours to predict utilities cost.
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