Davenport Acct 640 case 3Following is a Monthly Income Statement based on absorption costing for Performance Drinks:You begin to wonder if there would be any value in repackaging the income statement in a way that would report Contribution Margin as opposed to Gross Margin. You know that in order to report Contribution Margin you will need to understand your costs as variable and fixed. Unfortunately the general ledger does not specifically report costs as variable and fixed. You remember learning that regression analysis can be used to generate data that can be used to create a total cost equation. With the total cost equation we can understand our total cost as the sum of fixed costs and variable costs. After doing some research your collect the following data related to overhead and possible causal factors:Requirement #1Using the data above which has also been provided electronically in Excel run the following regression analyses:• Linear regression analyzing total overhead cost and units sold• Linear regression analyzing total overhead cost and machine hours used• Multiple regression analysis analyzing total overhead cost along with both units sold and machine hours usedRequirement #2Based on the results from the three regression analyses determine which correlation provides the best estimate of the total cost equation. Explain why you selected the correlation that you did.Requirement #3Write out the total cost equation using the results from the multiple regression test.Requirement #4Create a “Contribution” formatted income statement using the results from the multiple regression test. Your selling price per unit and your direct material cost per unit and your direct labor cost per unit and your fringe benefits all come from the original “Traditional” income statement. Use the following additional information regarding machine hours used by each product to compute variable overhead.Reference the following sales volumes by product for your cost allocation related to units sold. This data will help you calculate variable overhead.Use the following template as a guide for the format of your “Contribution” Income Statement:Requirement #5Compute the following:• Break-even point in units• Break-even point in sales dollars• Targeted profit point in units (use $50 000 as your targeted profit point)• Margin of SafetyRequirement #6A new customer has surfaced. That customer has asked you to consider producing a special one-time order for them. This special order would require a modification to the recipe that will slightly increase the variable cost per unit. Furthermore there would be a small fixed cost addition. The details for the order as follows:Conduct a differential analysis regarding this special order. Would you accept this order under the conditions provided? Explain and defend your position.Requirement #7:Your management team has asked you to consider investing in a new piece of equipment. The details of that investment opportunity are following:The discount rate for this project is 5%. Compute the following:• Net Present Value• Internal Rate of ReturnWould you recommend investing in this new piece of equipment? Explain and defend your position.
