$0\mathrm{.}5\mathrm{.}4\mathrm{.}5\mathrm{.}9)5\mathrm{.}72.$ Cost Estimation, CVP Analysis, and Decision Making

Luke Corporation produces is variety of products, each within their own division, Lay jeat,

machines. The product, which sells for $$5\mathrm{.}25$ per case, has not had the ma set sucese that mitet

ers expected, and the company is considering dropping Bubbs.

The product$-$line income statement for the past $12$ months follows.

All products at Luke receive an allocation of corporate overhead costs, which is computed a

$5$ percent of product revenue. The $5$ percent rate is computed based on the most recent yeefs

corporate cost as a percentage of revenue. Data on corporate costs and revenues for the pastar

years follow.

Roy Q$.$ Andre, the product manager for Bubbs, is concerned about whether the product will

dropped by the company and has employed you as a financial consultant to help with some ant

sis. In addition to the information given. Mr$.$ Andre provides you with the following data ongent

uct costs for Bubbs. $1$

Average monthly fixed costs $=$$$115,10024,=$$$4\mathrm{.}796$

Variable cost per DLH $=$$$90,00012,000=$$$7\mathrm{.}50$

Variable cost per machine$-$hour $=$$$90,00014,400=$$$6\mathrm{.}25$

Variable cost per unit produced $=$$$90,00020,000=$$$4\mathrm{.}50$

Based on the statistical results, overhead costs appear more closely related to output measured

in baskets than to labor$-$hours. The coefficient of determination $(R^2)$ is $\mathrm{.}54$ for labor$-$hours and

$\mathrm{.}78$ for baskets. This suggests that $54$ percent of the variation in overhead costs is "explained"

by labor$-$hours, but $78$ percent is "explained" by output. However, we would not want to make

the determination based on statistical results alone. We should ensure that there are good rea$-$

sons that overhead costs are related to output.