Question

I got the first question. I am having trouble on questions2.

The answer for what regression equation to use for Question 1is:

Overhead = 1,732.06012 + 81.92799 * Number of Setups + 4.21711 *Machine Hours

Sorrentino Company, which has been in business for one year,manufactures specialty Italian pastas. The pasta products start inthe mixing department, where durum flour, eggs, and water are mixedto form dough. The dough is kneaded, rolled flat, and cut intofettucine or lasagna noodles, then dried and packaged.

Paul Gilchrist, controller for Sorrentino Company, is concernedbecause the company has yet to make a profit. Sales were slow inthe first quarter but really picked up by the end of the year. Overthe course of the year, 717,500 boxes were sold. Paul is interestedin determining how many boxes must be sold to break even. He hasbegun to determine relevant fixed and variable costs and hasaccumulated the following per unit data:

Price $0.95

Direct materials 0.35

Direct labor 0.25

He has had more difficulty separating overhead into fixed andvariable components. In examining overhead-related activities, Paulhas noticed that machine hour appear to be closely correlated withunits in that 100 boxes of pasta can be produced per machine hour.Setups are important batch-level activity. Paul also thinks thatindirect labor hour may be associated with the overhead expense,but there is no evidence showing the relation. Currently, indirectlabor hour is scheduled to be 2000 hours per year. Paul hasaccumulated the following information on overhead costs, number ofsetups, machine hours, and indirect labor hours for the past 12months. Month	Overhead	Number of Setups	Machine Hours	Indirect Labor Hours
January	$5,700	18	595	155
February	4,500	6	560	135
March	4,890	12	575	125
April	5,500	15	615	200
May	6,320	20	680	240
June	5,100	10	552	183
July	5,532	16	630	205
August	5,409	12	600	115
September	5,300	11	635	162
October	4,950	12	525	145
November	5,350	14	593	185
December	5,600	14	615	150

Selling and administrative expenses, all fixed, amounted to$200,000 last year.

In the second year of operations, Sorrentino Company has decidedto expand into the production of sauces to top its pastas. Saucesare also started in the mixing department, using the sameequipment. The sauces are mixed, cooked, and packaged into plasticcontainers. One jar of sauce is priced at $2 and required $0.65 ofdirect materials and ACC320 Group Project 1—CVP and RegressionAnalysis

$0.45 of direct labor. 60 jars of sauce can be produced permachine hour. The production manager believes that with carefulscheduling, he can keep the total number of setups and total numberof indirect labor hours (for both pasta and sauce) to the samenumber as used last year. The marketing director expects toincrease selling expense by $30,000 per year to promote the newproduct and believes Sorrentino Company can sell three boxes ofpasta for every one jar of sauce.

Required:

1. Separate overhead into fixed and variable components usingregression analysis. Run seven regressions by using differentcombinations of three independent variables: number of setups,machine hours, and indirect labor hours. These seven regressionsare: a) three simple regressions; b) three multiple regressionsusing two independent variables; c) multiple regression using allindependent variables. Which regression equation is the best?Why?

Now, the best regression equation is chosen, use it to answerthe following questions:

2. Calculate the number of boxes of pasta which must be sold tobreak even before the expansion into the production of sauces.

3. Now consider the production of sauces, calculate thebreak-even number of boxes of pasta and jars of sauce.

4. Suppose that the production manager is wrong and that thenumber of setups doubles. Calculate the new break-even number ofboxes of pasta and jars of sauce.

5. Refer to the original data. Suppose that only 40 jars ofsauce can be produced per machine hour and that Sorrentino Companywill sell two boxes of pasta for every one jar of sauce. Calculatethe new break-even number of boxes of pasta and jars of sauce.

6. Comment on the effects of the shift in sales mix anduncertainty