Your company is preparing an estimate of its production costs for the coming period. The controller estimates that direct materials costs are $45 per unit and that direct labor costs are $21 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult. The controller€™s office estimated overhead costs at $3,600 for fixed costs and $18 per unit for variable costs. Your colleague, Lance, who graduated from a rival school, has already done the analysis and reports the €œcorrect€ cost equation as follows:
Overhead = $10,600 + $16.05 per unit
Lance also reports that the correlation coefficient for the regression is .82 and says, €œWith 82 percent of the variation in overhead explained by the equation, it certainly should be adopted as the best basis for estimating costs.€
When asked for the data used to generate the regression, Lance produces the following:

The company controller is somewhat surprised that the cost estimates are so different. You have therefore been assigned to check Lance€™s equation. You accept the assignment with glee.

Required
Analyze Lance€™s results and state your reasons for supporting or rejecting his costequation.

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Month Overhead Unit Production $57,144 60,756 . 77,040 56,412 81,396 72,252 63,852 .. 73,596 77,772 60,048 61,632 3,048 3,248 4,176 3,000 3,408 3,928 3,336 4,016 4,120 3,192 3,368 4,080 3,888 10 0 12. 13 73,248