THE BETA COMPANY

THIS CASE HIGHLIGHTS THE USE OF REGRESSION

ANALYSIS IN MAC FOR DECISION MAKING AND
ESTIMATION.

AGENDA:
DETERMINE THE RELATIONSHIP BETWEEN VOLUME
AND THE PRODUCTION OVERHEADS.
PROVIDES A MEASURES OF RELIABILITY.
HELPS IDENTIFY RELEVANT COSTS.
BETA COMPANY / DR ASHISH / 1
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EVALUATION OF THE PROPOSAL USING THE RELEVANT COSTS
REQUIREMENT = 5000 ELECTRICAL COMPONENTS
SALES REVENUE = ( 5000 X 50 EURO)= 250000
LESS: RELEVANT COST
DIRECT LABOUR ( 5000 X 1 HOUR X 6 EURO X 150%)= (45000)
DIRECT MATERIAL
A ( 5000 UNITS X 1 KG X 4 EURO ) = (20000)
B (5000 UNITS X 0.5 KG X 2 EURO ) = (5000)
C ( 5000 UNITS X 2 KG X 6 EURO ) = (60000)

VARIABLE OVERHEADS ( 5000 UNITS X 1 HR X 19.33 ) = ( 96650)

FIXED OVERHEADS( 5730 EURO IRRELEVANT IN SPECIAL ORDER
SITUATION)
SURPLUS BETA COMPANY / DR ASHISH / = 23,3502
IMT / 2010
 Y= a + b X

• .b = 19.33
• OVERHEAD = FIXED + VARIABLE
• Variable overhead = Units X cost

BETA COMPANY / DR ASHISH / 3

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NOTE

IF THE REGRESSION EQUATION ( BASED ON

MACHINE HOURS ) WAS USED INSTEAD , THEN
THE VARIABLE OVERHEADS WILL BE
5000 UNITS X 10/60 MINUTES X 153.38 = 127816 .
AND THE ABOVE SURPLUS WILL CHANGE TO A
DEFICIT OF 7816 EURO.
HOW DO WE DECIDE WHETHER REG 1 ( DLH) IS
APPROPIRATE OR REG 2 ( MH ) IS BETTER.

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TEST OF LINEARITY OF REGRESSION EQUATION

REGRESSION EQUATION 1 2

R SQUARE ( R2) 0.97 0.60

.t value of independent or
Explanatory variable. 19.49/ 0.98 147.96/38
( Coeff of independent
Variable / standard error of the 19.88 3.89
Regression coeff for the independent
Variable )

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NOTE BOTH THE REGRESSIONS ARE STATISTICALLY
SIGNIFICANT USING A 95 % CONFIDENCE LEVEL
( 2.228 ) . ALSO ,
ABSOLUTE VALUE OF T RATIO > TABLE VALUE FOR
N-2 , Degrees of freedom and therefore its is statistically
significant.

HOWEVER REGRESSION EQUATION 1 ( DLH )IS FAR

SUPERIOR REGARDING THE OVERALL GOODNESS OF
FIT.

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NOTE AT 95% CONFIDENCE INTERVAL FOR VARIABLE
PRODUCTION OVERHEAD

CONFIDENCE
INTERVAL 19.49 + 147.96 +
(2.228 X 0.98 ) (2.228 X 38 )

21.67 TO 17.31 232.6 TO 63.29.

BETA COMPANY / DR ASHISH / 7

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BASED ON THE REGRESSION NO 1 THE MAXIMUM
VARIABLE OVERHEAD PER DIRECT LABOUR HOUR
WE COULD ANTICIPATE IS 21.67 EURO.

THUS MAXIMUM VARIABLE OVERHEAD WOULD BE

5000 UNITS X 1 HOUR X 21.67 EURO = 108, 350 EUROS
BASED ON A 95% CONFIDENCE LEVEL.

THIS REVISED , WORST ESTIMATE WOULD STILL

MAKE THE PROPOSAL WORTHWHILE.

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