[SOLVED] Dave Barry, an engineer, is the general

Dave Barry, an engineer, is the general manager of the Beta Company, which manufactures a general range of animal food products. Since joining the company, the sales have been static in both volume and value terms. Now, at the start of the New Year, a potential new customer has approached Beta, requiring the production of a special animal food product. Beta can meet the customerâ€™s product specifications, but Dave Barry is unsure whether the proposal is financially viable. Among his problems is the issue of trying to accurately estimate appropriate overhead costs, especially production overheads, for this special order. He now realizes that the simple question â€˜How much does it cost?â€™ had a range of acceptable answers! However, he was determined to find the best answer in the context of the recent enquiry for this special order. The Information Available: The proposal, which Barry is considering, is for the production of 5,000 bags of specially blended animal food. The current price offer of â‚¬60 per bag represents a total contract price of â‚¬300,000. However, the main issue concerned the accurate estimation of relevant costs in relation to materials, labour and overheads for this proposed job. You have been asked to assist in preparing these calculations and have been provided with the following information: Materials: Each bag of food product requires three different types of raw material ingredient, designated A, B and C, respectively. Quantities required (in kg) and additional information is as follows:

Material A is used regularly by the company in the production of other food products and, if used on this special contract, will be immediately replaced. However, material B is in excess of the company's requirements and unless used in the production of this special order would be sold to other manufacturers. The required amount of material C, since none are in stock, would be specially purchased for this contract. Direct labour: Currently production workers were paid a basic hourly rate of â‚¬10. Because the company is working close to maximum capacity, direct labour (employees) would work at weekends only, for which they will be paid overtime at time and a half i.e. 150 per cent of the normal rate. Barry estimates that the entire job could be completed over 12 weekends. Production overheads: Because the companyâ€™s costing procedures were rather basic, Betaâ€™s cost department were unable to provide reliable estimates of the amount of production overhead associated with this special contract. The sales manager, Jack Russell, argued that overheads were irrelevant for pricing purposes because, by definition, they could not be attributed to any individual product or specific job and therefore, the whole process was arbitrary. Furthermore, he argued that if only labour and materials were included in the costing process it would enable a very competitive contract price to be quoted. A keen price would virtually guarantee that the contract was obtained and that, subsequently, profits could be generated on repeat business from this new customer, which should be forthcoming because of the initial low price quoted. To complicate the discussion on the cost estimation process, the managers of Beta could not agree on what â€˜causedâ€™ production overheads in the company. The production manager argued that production overhead costs were driven by labour operations because of the labour intensive mixing process of the various ingredients. In contrast, Dave Barry suggested that production overhead costs were driven by the use of very expensive machines. At this stage, the only agreement regarding absorbing overhead costs were that each bag of special food products would require 1 direct labour hour and 10 minutes of machine time. Selling and administration overheads: There was little discussion on these costs as they included a variety of items and they did not change from year to year. However, it was noted, in discussion, that it was normal policy to add 10 per cent to total production costs to recover these non-production overhead costs. Furthermore, the marketing manager noted that it was also company policy to add 10 per cent to total cost to provide a profit margin. Dave Barry believed that an accurate classification of production overheads was his first task. He remembered from his management accounting course at College that the first thing he needed to do was to identify the â€˜cost driverâ€™ for production overheads. He reasoned that an analysis of historical data might help him to obtain such a reliable relationship. It was logical to start with two alternatives, namely, direct labour hours worked and machine running time, because information was currently available on these (Exhibit 1), even if it was for the last 12 weeks and noted that the observations showed adequate variability in activity levels. Therefore, he believed that one of these relationships (or possibly both) could be used to determine a production overhead cost behaviour pattern. The Managerial Decision Having quickly revised a basic management accounting text dealing with cost prediction, Barry realized that two methods could be used to determine a cost behaviour relationship with a cost driver. However, he requires you to assist him in the appropriate calculations which will be an important justification for accepting, rejecting or renegotiating the special order which he has recently received. Required: 1. Determine the historical cost behaviour pattern of the production overhead costs using the high- low method. You should separately use direct labour hours and machine running hours. Can you be confident in justifying your choice of the independent i.e. explanatory variable? 2. Determine the historical cost behaviour pattern of the production overhead costs using regression analysis. You should separately use direct labour hours and machine running hours. Justify your choice of independent i.e. explanatory variable. Which regression equation would you use and why? 3. Based on your preferred regression equation, calculate the surplus or deficit to be generated on this special contract. What is the minimum price that would be acceptable to Beta Company? Would you recommend that Barry accept the proposal? How did you arrive at your conclusion? Would your recommendation change if the company were operating at considerably below maximum capacity? 4. Calculate a 95 per cent confidence interval for the variable production overhead per bag based on your preferred regression equation. To what extent could this confidence interval influence your recommendation of accepting or rejecting the order? Explain.

Question: Dave Barry, an engineer, is the general