Balcom Enterprises Is Planning to Introduce a New Product That

question 35

Multiple Choice

Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.Manufacturing cost estimates for 20,000 units for the first year of production are: • Direct materials $1,000,000
• Direct labor $720,000 (based on $18 per hour × 40,000 hours)
Although overhead has not be estimated for the new product,monthly data for Balcom's total production for the last two years has been analyzed using simple linear regression.The analysis results are as follows:

$$\begin{array} { | l | l | } \hline \text { Dependent wariable } & \text { Factory overhead costs } \\\hline \text { Independent variable } & \text { Direct labor hours } \\\hline \text { Intercept } & \$ 120,000 \\\hline \text { Coefficient on independent } & \$ 5.00 \\\text { variable } & \\\hline \text { Coefticient of correlation } & 0.911 \\\hline \text { R } ^ { 2 } & 0.814\\\hline\end{array}$$
Based on this information,what is the total overhead cost for an estimated activity level of 45,000 direct labor-hours?

• A) $125,000
• B) $345,000
• C) $600,000
• D) $225,000

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Definitions:

Profit-maximizing Quantity

The quantity of a product that results in the highest possible profit for the producer, determined by the point where marginal cost equals marginal revenue.

Production Function

A mathematical relation that describes the maximum output of a good derived from different combinations of factors of production.

Cost Per Unit

The total cost incurred in producing, manufacturing, or acquiring a single unit of a specific good or service.

Profit Maximization

The approach a business takes to determine the pricing and output that lead to the utmost profit.