Where Y is the monthly support overhead (Please see the attached files).
1) Plot the monthly data and the regression lines for each of the following cost function:
a. Support overhead costs = a+(b*Machine-hours)
b. Support overhead costs = a+(b*Number of batches)
Which cost driver for support overhead costs would you choose? Explain.
2) Chu anticipates 2,600 machines-hours and 300 batches for next month. Using the cost driver you chose in requirement 1, what amount of support overhead cost should Chu budget?
3) Chu adds 20% to costs to determine target revenues (and hence prices). Costs other than support overhead are expected to equal $125,000 next month. Compare the target revenue numbers obtained if the cost driver is (i) machine-hours or (ii) number of batches. What would happen if Chu picked the cost driver you did not choose in requirement 1 to set target revenues and prices? Describe any other implication of choosing the "other" cost driver and cost function.
Regression analysis, activity-based costing and choosing cost drivers are examined in the solution for Rohan Plastics.