Method of Least Squares Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controller's department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows: Receiving Cost ($ Month Receiving Orders 1 1,000 27,000 22,500 2 700 1,500 3 42,000 1,200 4 25,500 1,300 37,500 6 1,100 31,500 1,600 7 43,500 36,000 1,400 9 1,700 40,500 10 900 24,000 Suppose that Tracy has gathered two more months of data: Month Receiving Cost ($) Receiving Orders 1,200 11 42,000 12 950 26,250 For the following requirements, round the intercept terms to the nearest dollar and round the variable rates to the nearest cent. 1. Run two regressions using a computer spreadsheet program such as Excel. First, use the method of least squares on the first 10 months of data. Then, use the method of least squares on all 12 months of data. Select the results for the intercept, slope, and R2 for each regression. 10 Months' Data 12 Months' Data Intercept Slope R2 Compare the results. The input in the box below will not be graded, but may be reviewed and considered by your instructor. 2. On your own paper, prepare a scattergraph using all 12 months of data. Which month appears to be an outlier? Suppose Tracy has learned that the factory suffered severe storm damage during month 11 that required extensive repairs to the receiving area-including major repairs on a forklift. These expenses, included in month 11 receiving costs, are not expected to recur. What step might Tracy, using her judgment, take to amend the results from the method of least squares? The input in the box below will not be graded, but may be reviewed and considered by your instructor. 3. Rerun the method of least squares, using all the data except for month 11. (You should now have 11 months of data.) What is the variable rate (to the nearest cent) and the fixed cost that would be used a cost formula for receiving based on these results? per receiving order Variable rate Fixed cost Calculate the predicted receiving cost for a month with 1,450 receiving orders. In your calculations, round variable cost per unit to two decimal places. Round your final answer to the nearest dollar. Discuss the results from this regression versus those from the regression for 12 months of data. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
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