Cost-volume-profit and regression analysis Goldstein Corporation manufactures a children’s bicycle, model CT8. Goldstein currently manufactures the bicycle frame. During 2012, Goldstein made 32,000 frames at a total cost of $1,056,000. Ryan Corporation has offered to supply as many frames as Goldstein wants at a cost of $32.50 per frame. Goldstein anticipates needing 35,000 frames each year for the next few years.

Required

1. a. What is the average cost of manufacturing a bicycle frame in 2012? How does it compare to Ryan’s offer?

b. Can Goldstein use the answer in requirement 1a to determine the cost of manufacturing 35,000 bicycle frames? Explain.

2. Goldstein’s cost analyst uses annual data from past years to estimate the following regression equation with total manufacturing costs of the bicycle frame as the dependent variable and bicycle frames produced as the independent variable:

y = $435,000 + $19X

During the years used to estimate the regression equation, the production of bicycle frames varied from 31,000 to 35,000. Using this equation, estimate how much it would cost Goldstein to manufacture 35,000 bicycle frames. How much more or less costly is it to manufacture the frames rather than to acquire them from Ryan?

3. What other information would you need to be confident that the equation in requirement 2 accurately predicts the cost of manufacturing bicycle frames?