Question

Scattergraph Method. Castanza Company produces computer printers. Management wants to estimate the cost of production equipment used to produce printers. The company reported the following monthly cost data related to production equipment (this is the same data as the previous exercise):

Reporting Period (Month)	Costs	Machine Hours
January	$  920,000	45,000
February	600,000	25,000
March	500,000	20,000
April	1,100,000	90,000
May	1,140,000	95,000
June	620,000	30,000
July	880,000	38,000
August	910,000	48,000
September	1,060,000	78,000
October	960,000	51,000
November	1,400,000	96,000
December	980,000	54,000

1. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v.
2. What would Castanza Company’s estimated costs be if it used 50,000 machine hours next month?
3. What would Castanza Company’s estimated costs be if it used 15,000 machine hours next month?

Answer 1

Following the five steps of the scattergraph method, the regression line was fitted into the scattergraph. The scattergraph thus prepared is as follows:

The point where the regression line intercepts the Y axis indicates the fixed cost. In this case, the fixed cost is $429,995. The variable cost is 8.6721 per unit. Therefore, the cost equation is as follows:

Y = $429,995 + $8.6721 x

Using this equation, the total cost can be calculated for the next month:

a. total cost with 50,000 machine hours:

Y = $429,995 + $8.6721 (50,000) = $863,600

b. Total cost with 15,000 machine hours:

Y = $429,995 + $8.6721 (15,000) = $560,007