Solved: Kimball Company has developed the following cost

formulas Material usage Ym

Kimball Company has developed the following cost formulas Material usage Ym

Kimball Company has developed the following cost formulas:

Material usage: Ym = $80X; r = 0:95

Labor usage (direct): Yl = $20X; r = 0:96

Overhead activity: Yo = $350,000 + $100X; r = 0:75

Selling activity: Ys = $50;000 + $10X; r = 0:93

where

X = Direct labor hours

The company has a policy of producing on demand and keeps very little, if any, finished goods
inventory (thus, units produced equals units sold). Each unit uses one direct labor hour for
production.

The president of Kimball Company has recently implemented a policy that any special orders
will be accepted if they cover the costs that the orders cause. This policy was implemented
because Kimball’s industry is in a recession and the company is producing well below capacity
(and expects to continue doing so for the coming year). The president is willing to accept orders
that minimally cover their variable costs so that the company can keep its employees and avoid
layoffs. Also, any orders above variable costs will increase overall profitability of the company.

Required:

1. Compute the total unit variable cost. Suppose that Kimball has an opportunity to accept an
order for 20,000 units at $220 per unit. Should Kimball accept the order? (The order would not
displace any of Kimball’s regular orders.)

2. Explain the significance of the coefficient of correlation measures for the cost formulas. Did
these measures have a bearing on your answer in Requirement 1? Should they have a
bearing? Why or why not?

3. Suppose that a multiple regression equation is developed for overhead costs: Y = $100,000 +
$100X1 + $5,000X2 + $300X3, where X1 = direct labor hours, X2 = number of setups, and X3 =
engineering hours. The coefficient of determination for the equation is 0.94. Assume that the
order of 20,000 units requires 12 setups and 600 engineering hours. Given this new information,

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 should the company accept the special order referred to in Requirement 1? Is there any other
information about cost behavior that you would like to have? Explain.

Kimball Company has developed the following cost formulas Material usage Ym

ANSWER
https://solvedquest.com/kimball-company-has-developed-the-following-cost-formulas-material-
usage-ym/

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