Cost Estimation

In recent years the shipbuilding firm Bond Voyage has begun making a new fuel-efficient model of small cruise ship, which is very different from the products it had built in the past. The firm needs your help in planning its direct labor and overhead costs for the coming year. Open the data for this assignment provided in Desire2Learn under Assignments. This file shows the direct labor hours worked for each individual ship produced, the wage per direct labor hour at the time of production, and the total direct labor cost and direct labor-related overhead for each unit. (These data come from a period of labor scarcity, in which wages increased rapidly.) Use the data file to answer the following questions: 1. Which is the better cost driver for direct labor-related overhead costs: direct labor costs or direct labor hours? Explain your choice briefly and show scatterplot and regression outputs (including the plots in the regression program) supporting your decision. In order to predict future direct labor and overhead costs, you will need to be able to predict the direct labor hours required to build future ships, regardless of which cost driver you choose in question 1. (Even if labor costs are the best driver for overhead costs, you will need to know direct labor hours in order to budget for direct labor costs.) It is clear from the data that direct hours per unit is not constant but decreases per ship as more ships are made. 2. Which of the following models is the better model for predicting the direct labor hours required to build ships in the future? Explain briefly and show scatterplot and regression outputs (including the plots in the regression program). (a) A regression of direct labor hours (y = column B) on number of units (x = column A). (b) A regression of the natural log of direct labor hours [y = ln(column B)] on the natural log of unit numbers [x=ln(column A)]. The answer to question 2 should provide you with a learning-curve function that will allow you to predict the direct labor hours required to build the next ships. 3. Suppose Bond Voyage plans to build 5 ships next year (ships #21 through 25), and Answer the following questions, and provide the spreadsheet that you used to calculate these answers. (a) What is the learning curve function for direct labor hours that Bond Voyage can use to estimate time to build (each of) these five ships? (b) What is the linear cost function (based on direct labor hours as a cost driver) that Bond Voyage can use to estimate total direct labor costs for (each of) these five ships? Hint: Make reasonable assumptions about any other parameter involved in the cost function. (c) What is the linear cost function that Bond Voyage can use to estimate total direct labor-related overhead costs for (each of) these five ships? Write these three functions out as formulas (e.g., “Total Overhead Costs = …”). (d) Using these three functions, what is the direct labor hours, direct labor cost, overhead cost, and total labor-related costs, for each of these five ships and for all five ships in total?                      

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