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The controller of Chittenango Chain Company believes that the identification of the variable and fixed components of the firm’s costs will enable the firm to make better planning and control decisions. Among the costs the controller is concerned about is the behavior of indirect-materials cost. She believes there is a correlation between machine hours and the amount of indirect materials used.
A member of the controller’s staff has suggested that
least-squares regression be used to determine the cost behavior of
indirect materials. The regression equation shown below was
developed from 40 pairs of observations.
S = $200 + $9H
where S = Total monthly cost of indirect materials
H = Machine hours per month
The high and low activity levels during the past four years, as measured by machine hours, occurred during April and August, respectively. Data concerning machine hours and indirect-materials usage follow.
Determine the cost of indirect materials used during April and August.