Answers Homework # 4 - Budgeting

Dear RASHMI ,
Thank you for your conformance and efforts for Homework # 4. Below are your performance
against the homework.
1. For cost estimation simple regression differs from multiple regression in that simple regression
uses only
a. one dependent variable, while multiple regression uses all available data to estimate
the cost function.
b. dependent variables, while multiple regression can use both dependent and
independent variables.
c. one independent variable, while multiple regression uses more than one independent
variable.
d. one dependent variable, while multiple regression uses more than one dependent
variable.
You have answered C which is Correct!
Correct answer c. Simple regression analysis estimates the relationship between the dependent variable and
one independent variable while multiple regression analysis estimates the relationship between the
dependent variable and two or more independent variables.
Y=40+3X is an example of Simple Linear Regression equation

Z=30+4X+7Y is an example of Multiple Linear Regression equation
Y=40+3X^2 is an example of Simple Non-Linear Regression equation
Z=30+3X^3+7Y^2 is an example of Multiple Non-Linear Regression equation
Simple regression will comprise one independent and one dependent variable
Linear means both independent and dependent variable will have power of 1, e.g. Y^1 or X^1 in Y=40+3X
equation
If any of the independent or dependent variable has power that is more than 1, then this is a Non-Linear
regression case.
2. A company has accumulated data for the last 24 months in order to determine if there is
an independent variable that could be used to estimate shipping costs. Three possible
independent variables being considered are packages shipped, miles shipped, and
pounds shipped. The quantitative technique that should be used to determine whether
any of these independent variables might provide a good estimate for shipping costs is
a. flexible budgeting.
b. linear programming.
c. linear regression.
d. variable costing.
Correct answer c. Using linear regression, there are three criteria for selecting the
independent variable: economic plausibility, goodness of fit, and the slope of the regression line.
There are several criteria that can be used to select the number of independent
variables in a regression model. These criteria are based on the principle of parsimony,
using a minimum of independent variables and attaining a minimum sum of squared
errors (SSE)
3. In order to analyze sales as a function of advertising expenses, the sales manager of Smith
Company developed a simple regression model. The model included the following
equation, which was based on 32 monthly observations of sales and advertising expenses
with a related coefficient of determination of .90.
S = $10,000 + $2.50A
S = sales
A = advertising expenses
If Smith Company’s advertising expenses in one month amounted to $1,000, the related
point estimate of sales would be
a. $2,500.
b. $11,250.
c. $12,250.
d. $12,500.
You have answered D which is Correct!
Correct answer d.
Using the regression equation, S= 10000 +2.5x1000=12,500. There is a temptation to answer the option b using
and multiplying 12500 with 0.9. Co-efficient of determination 0.9 signifies that S is dependent on A 90% time and
some unknown factors/variables other than advertising expense A is influencing S. This is another issue - the issue
of correctness of model formation. The answer is straight cut d using the regression equation.
4. The results of regressing Y against X are as follows.

Coefficient
Intercept 5.23
Slope 1.54
When the value of X is 10, the estimated value of Y is
a. 6.78.
b. 8.05.
c. 20.63.
d. 53.84
Correct answer is c. This is a very straight, easy problem. Y = a

(intercept)+b(slope)X =5.23+8.05*10 = 20.63
5. Which one of the following techniques would most likely be used to analyze reductions in
the
time required to perform a task as experience with that task increases?
a. Regression analysis.
b. Learning curve analysis.
c. Sensitivity analysis.
d. Normal probability analysis.
You have answered B which is Correct!

Correct answer b. Learning curve analysis is a function that shows how labor hours per unit decline as
units of production increase due to workers learning and becoming better at their jobs. Learning curve
phenomena also entails that costs of production per unit decreases over time due to learning effect.
6. Aerosub Inc. has developed a new product for spacecraft that includes the manufacturing of a
complex part. The manufacturing of this part requires a high degree of technical skill.
Management believes there is a good opportunity for its technical force to learn and improve as
they become accustomed to the production process. The production of the first unit requires
10,000 direct labor hours. If an 80% learning curve is used and eight units are produced, the
cumulative average direct labor hours required per unit of the product will be
a. 5,120 hours.
b. 6,400 hours.
c. 8,000 hours.
d. 10,000 hours.
You have answered A which is Correct!
Correct answer a. In the cumulative average-time learning model, the cumulative average time per unit
declines by a constant percentage each time the cumulative quantity of units produced doubles.
Unit 1 10,000 hrs. Unit 2 8,000 hrs. (10,000 x .80) // average time to produce 2 units Unit 4 6,400 hrs.
(8,000 x .80) // average time to produce 4 units Unit 8 5,120 hrs. (6,400 x .80) // average time to produce
8 units
If you were asked to calculate total time to produce 8 units, the answer would have been 5120x8 hours
7. A manufacturing firm plans to bid on a special order of 80 units that will be manufactured in
lots of 10 units each. The production manager estimates that the direct labor hours per unit will
decline by a constant percentage each time the cumulative quantity of units produced doubles.
The quantitative technique used to capture this phenomenon and estimate the direct labor hours
required for the special order is
a. cost-profit-volume analysis.
b. the Markov process.
c. linear programming analysis.
d. learning curve analysis.
You have answered D which is Correct!
Correct answer d. In the cumulative average-time learning model, the cumulative average time
per unit declines by a constant percentage each time the cumulative quantity of units produced
doubles.
8. A manufacturing company has the opportunity to submit a bid for 20 units of a product on
which it has already produced two 10-unit lots. The production manager believes that the
learning experience observed on the first two lots will continue for at least the next two lots. The
direct labor required on the first two lots was as follows.
• 5,000 direct labor hours for the first lot of 10 units
• 3,000 additional direct labor hours for the second lot of 10 units
The learning rate experienced by the company on the first two lots of this product is
a. 40.0%.
b. 60.0%.
c. 62.5%.
d. 80.0%.
You have answered C which is Wrong
Correct answer d.
You will consider 1 lot is as good as 1 unit.

First lot takes 5000 hours
Upto Second lot (cumulative) takes 5000+3000 = 8000 hours
Cumulative average time taken = 8000/2 = 4000/Lot which is 4000/5000=80% of the fist lot.
Hence Learning rate is 80%
9. Aerosub Inc. has developed a new product for spacecraft that includes the manufacture of a
complex part. The manufacturing of this part requires a high degree of technical skill.
Management believes there is a good opportunity for its technical force to learn and improve as
they become accustomed to the production process. The production of the first unit requires
10,000 direct labor hours. If an 80% learning curve is used, the cumulative direct labor hours
required for producing a total of eight units would be
a. 29,520 hours.
b. 40,960 hours.
c. 64,000 hours.
d. 80,000 hours
You have answered A which is Wrong
Correct answer b. In the learning curve analysis problem, they tell you to reach to a given unit. You
start with 1 and keep on multiplying it with 2 until that unit is reached. In this case, they want you to
reach to 8th unit, starting from 1. How you go? 1x2 = 2, 2x2=4, 4x2 = 8. You have to
multiply 10,000 DL hours 3 times with the learning rate.
Cumulative average time taken to produce the 8 units = 10,000 x 0.8 x 0.8 x 0.8 = 5,120.
So, cumulative time taken to produce 8 units = cumulative average for 8 units x 8 units = 5,120 x 8 =
40,960 hours
10. Propeller Inc. plans to manufacture a newly designed high-technology propeller for
airplanes. Propeller forecasts that as workers gain experience, they will need less time to
complete the job. Based on prior experience, Propeller estimates a 70% cumulative learning
curve and has projected the following costs.
Cumulative number Manufacturing Projections

of units produced Average cost per unit Total costs
1 $20,000 $20,000
2 14,000 28,000
If Propeller manufactures eight propellers, the total manufacturing cost would be
a. $50,660.
b. $54,880.
c. $62,643.
d. $112,000.
You have answered B which is Correct!
Correct answer b.
The Learning Curve phenomenon not only reduces time to produce a future unit but cost too and hence whatever we
have learnt for time reduction, also applies to cost reduction.
The 1st unit takes 20,000 USD to produce. The cumulative average cost for the 8 unit = 20,000 x 0.7 x 0.7 x 0.7 =
$6,860
Total cost incurred to produce 8 unit = 6860 x 8 = $54,880.
Summary of Performance in this Homework
Percentage score: 80
Remarks :Very Good, Keep this up
Remain motivated in this important phase of life. You are here for a cause and is not like the other people
who are enjoying their so-called LIFE. Everything in life comes at a cost. Walk with determination and
passion. I am with you in your endeavor to build capacity in yourself.
Good luck!
Regards,
Sushanta Bala

Answers Homework # 4 - Budgeting

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Dear RASHMI ,

You have answered C which is Correct!

Y=40+3X is an example of Simple Linear Regression equation

You have answered C which is Correct!

4. The results of regressing Y against X are as follows.

You have answered C which is Correct!

Correct answer is c. This is a very straight, easy problem. Y = a

You have answered B which is Correct!

You have answered A which is Correct!

You have answered C which is Wrong

You will consider 1 lot is as good as 1 unit.

You have answered A which is Wrong

Cumulative number Manufacturing Projections

If Propeller manufactures eight propellers, the total manufacturing cost would be

You have answered B which is Correct!

Summary of Performance in this Homework

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