.

Hankuk Electronics started production on a sophisticated new smartphone running the Android
operating system in January 2017. Given the razor-thin margins in the consumer electronics
industry, Hankuk’s success depends heavily on being able to produce the phone as economically
as possible.
At the end of the first year of production, Hankuk’s controller, Inbee Kim, gathered data on
its monthly levels of output, as well as monthly consumption of direct labor-hours (DLH). Inbee
views labor-hours as the key driver of Hankuk’s direct and overhead costs. The information
collected by Inbee is provided below:

Required:
1. Inbee is keen to examine the relationship between direct labor consumption and output levels.
She decides to estimate this relationship using a simple linear regression based on the monthly
data. Verify that the following is the result obtained by Inbee:

Regression 1: Direct labor-hours = a + (b × Output units)

Variable Coefficient Standard Error t-Value

Constant 345.24 589.07 0.59
Independent variable: Output units     0.71     0.93 0.76
r = 0.054; Durbin-Watson statistic = 0.50
2

2. Plot the data and regression line for the above estimation. Evaluate the regression using the
criteria of economic plausibility, goodness of fit, and slope of the regression line.
3. Inbee estimates that Hankuk has a variable cost of $17.50 per direct labor-hour. She expects that
Hankuk will produce 650 units in the next month, January 2018. What should she budget as the
expected variable cost? How confident is she of her estimate?

SOLUTION
(30 min.)  Cost estimation.

1.  Here is the summary output for the monthly regression of Direct Labor Hours on Output
Units for Hankuk Electronics:  

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.2333602
R Square 0.054457
Adjusted R
Square -0.0400973
Standard Error 206.18345
Observations 12

ANOVA
Significance
  df SS MS F F
Regression 1 24483.86 24483.86 0.575933 0.465422344
Residual 10 425116.1 42511.61
Total 11 449600      

Coefficient Standard Upper

  s Error t Stat P-value Lower 95% 95%
Intercept 345.24 589.07 0.59 0.57 -967.29 1657.77
X Variable 1 0.71 0.93 0.76 0.47 -1.37 2.79
2.   The plot and regression line for monthly direct labor hours on monthly output for Hankuk
Electronics are given below:

Economic  A positive relationship between direct labor hours and monthly output is
plausibility economically plausible since increased levels of production should lead to
 the consumption of greater amounts of direct labor.
Goodness of fit r = 5.45%, Adjusted r = - 4%
2 2

Standard error of regression = 206.18

Terrible fit; in fact, there is no evidence of a linear relationship between
the dependent and independent variables. At least one data point
represents a significant outlier.
Significance of The t-value of 0.76 for output units is not significant at the 0.05 level.  
Independent
Variables