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11.
12.
13.
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producing a better estimate of fixed and variable costs. A scattergraph also identifies outliers that could represent a high or low point that is an aberration. The main advantage of the high-low method is that it removes subjectivity from the choice process. The same line will be produced by two different people. 14. Assuming that the scattergraph reveals that a linear cost function is suitable, then the method of least squares selects a line that best fits the data points. The method also provides a measure of goodness of fit so that the strength of the relationship between cost and activity can be assessed. The best-fitting line is the one that is closest to the data points. This is usually measured by the line that has the smallest sum of squared deviations. No. The best-fitting line may not explain much of the total cost variability. There must be a strong relationship as well. The coefficient of determination is the percentage of total variability in costs explained
by the activity. As such, it is a measure of the goodness of fit, the strength of the relationship between cost and activity. 18. The correlation coefficient is the square root of the coefficient of determination. The correlation coefficient reveals the direction of the relationship in addition to the strength of the relationship. If the variation in cost is not well explained by activity usage (the coefficient of determination is low) as measured by a single driver, then other explanatory variables may be needed to build a good cost formula. If the mixed costs are immaterial, then the method of decomposition is unimportant. Furthermore, sometimes managerial judgment may be more useful for assigning costs than the use of formal statistical methodology.
19.
20.
15.
16.
17.
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EXERCISES 31
1. Number of Units 0 50,000 100,000 150,000 200,000 250,000 Total Cost $120,000 120,000 120,000 120,000 120,000 120,000 Cost per Unit NA $2.40 1.20 0 .80 0 .60 0 .48
2.
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1. Miles Traveled 0 $ 2,000 600 4,000 1,200 6,000 1,800 8,000 2,400 10,000 3,000 Total Cost 0 $0.00 0.30* 0.30 0.30 0.30 0.30 Cost per Mile
*$1,200/4,000 or $3,000/10,000 = $.30 2. The cost of fuel for the delivery activity is strictly variable.
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1.
Graph of Truck Depreciation
$250,000 $200,000 $150,000 $100,000 $50,000 $0
0 10 20 30 40 50 60 70 80 90 100
Depreciation Cost
2.
Graph of Raw Materials Cost
Cost of raw materials 3,000,000 2,000,000 1,000,000 0 1 2 3 4 5 Cubic yards of concrete Series2
3. Truck depreciation: Fixed cost Raw materials cost: Variable cost 3-4 1. Number of Units 0 10,000 20,000 30,000 40,000 50,000 Total Cost $10,000 10,000 10,000 20,000 20,000 30,000 Cost per Unit NA $1.00 0.50 0.67 0.50 0.60
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2.
3-5
1.
Graph of Machining Direct Labor Cost
350000 Cost of Direct Labor 300000 250000 200000 150000 100000 50000 0 0 1000 2000 3000 4000 5000 Number of units
The direct labor cost in the machining department is a step cost (with narrow steps). 2.
The cost of supervision for the machining department is a step cost (with wide steps).
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3. Direct labor cost increase = $144,000 $108,000 = $36,000 Supervision increase = $80,000 $40,000 = $40,000
3-6
Cost Category Technician salaries Laboratory facility Laboratory equipment Chemicals and other supplies Variable Cost Discretionary Fixed Cost X Committed Fixed Cost X X X
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Resource Jet rental Hotel rooms Buffet Favor package Buses Flexible/Committed Committed Committed Flexible Flexible Committed Cost Behavior Fixed Fixed Variable Variable Step
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1. Resource Plastic1 Direct labor and variable overhead2 Mold sets3 Other facility costs4 Total
1 2
0.90 $0.03 400,000 = $10,800; $10,800/400,000 = $0.027 $0.02 400,000 = $8,000; $8,000/400,000 = $0.02 3 $5,000 4 quarters = $20,000; $20,000/400,000 = $0.05 4 $10,000; $10,000/400,000 = $0.025 2. Plastic, direct labor, and variable overhead are flexible resources; molds and other facility costs are committed resources. The cost of plastic, direct labor, and variable overhead are strictly variable. The cost of the molds is fixed for
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the particular action figure being produced; it is a step cost for the production of action figures in general. Other facility costs are strictly fixed.
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1. Total maintenance cost = $24,000 + $0.30(200,000) = $84,000 2. Total fixed maintenance cost = $24,000 3. Total variable maintenance cost = $0.30(200,000) = $60,000 4. Total maintenance cost per unit = [$24,000 + $0.30(200,000)]/200,000 = $84,000/200,000 = $0.42 5. Fixed maintenance cost per unit = $24,000/200,000 = $0.12 6. Variable maintenance cost per unit = $0.30 7. Requirements1-6 repeated: 1. Total maintenance cost = $24,000 + $0.30(100,000) = $54,000 2. Total fixed maintenance cost = $24,000 3. Total variable maintenance cost = $0.30(100,000) = $30,000 4. Total maintenance cost per unit = [$24,000 + $0.30(100,000)]/100,000 = $54,000/100,000 = $0.54 5. Fixed maintenance cost per unit = $24,000/100,000 = $0.24 6. Variable maintenance cost per unit = $0.30
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1. Committed resources: trucks and technicians salaries Flexible resources: supplies, small tools, and fuel Variable activity rate = $420,000/35,000 = $12 per call Fixed activity rate = $600,000*/40,000** = $15 per call Total cost of one call = $12 + $15 = $27 per call *($24,000 20) + ($10,000 12); **8 250 20 3. Activity availability = Calls available = 40,000 calls = Total cost of committed resources $600,000 $600,000 Activity usage Calls made 35,000 calls + Unused capacity + Unmade calls + 5,000 calls Cost of unused capacity ($15 5,000) $75,000
2.
4.
Note: The analysis is restricted to committed resources, since only these resources will ever have any unused capacity.
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1. Committed resource charges: monthly fee, activation fee, cancellation fee (if triggered by contract cancellation prior to one year) Flexible resource charges: all additional charges for airtime, long distance and roaming 2. Plan 1: Minutes available 60 minutes Plan 2: Minutes available 120 minutes
= = = =
+ + + +
Plan 1 is more cost effective. Jana will have some unused capacity (on average, 15 minutes a month), and the overall cost will be lower by $10 per month. 3. Plan 1*: Minutes available 60 minutes
= =
+ + + +
*There are a number of ways to illustrate the use of minutes with Plan 1. Here are two possibilities. The problem, of course, is that all included monthly minutes are used, and Jana must purchase additional minutes. Plan 2: Minutes available 120 minutes = = Minutes used 90 minutes + + Unused minutes 30 minutes
Plan 2 is now more cost effective, as the monthly cost is $30. Under Plan 1, Jana will pay $20 plus $30 (30 minutes $1.00) or $50 per month. (The $1.00 additional charge includes the airtime and regional roaming charge.)
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3-12
1.
Graph of Cost of Giving Opening Shows 8000 7000 6000 Cost 5000 4000 3000 2000 1000 0 0 5 10 15 20 Number of opening shows
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3.
Graph of Ben's Total Costs
88000 87000 86000 Total Cost 85000 84000 83000 82000 81000 80000 79000 0 5 10 15 20 Number of opening shows
This is a mixed cost. 4. Total cost = $80,000 + $500(Number of opening shows) 5. Total cost = $80,000 + $500(12) = $86,000 Total cost = $80,000 + $500(14) = $87,000
3-13
1. The high point is March with 3,100 appointments. The low point is January with 700 appointments. 2. Variable rate = ($2,790 $1,758)/(3,100 700) = $1,032/2,400 = $0.43 per tanning appointment Using the high point: Fixed cost = $2,790 $0.43(3,100) = $1,457
OR
Using the low point: Fixed cost = $1,758 $0.43(700) = $1,457 3. Total tanning service cost = $1,457 + $0.43 Number of appointments 4. Total predicted cost for September = $1,457 + $0.43(2,500) = $2,532
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Total fixed cost for September = $1,457 Total predicted variable cost = $0.43(2,500) = $1,075
3-14
1.
Scattergraph of Tanning Services
3000 2500 Monthly Cost 2000 1500 1000 500 0 0 1000 2000 3000 4000 Number of appointments
Yes, it appears that there is a linear relationship between tanning cost and number of appointments. 2. Total cost of tanning services = $1,290 + $0.45 Number of appointments 3. Total predicted cost for September = $1,290 + $0.45(2,500) = $2,415
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1.
Cost
Number of Oil Changes The scattergraph provides evidence for a linear relationship. 2. High (1,400, $7,950); Low (700, $5,150) V = ($7,950 $5,150)/(1,400 700) = $2,800/700 = $4 per oil change F = $5,150 $4(700) = $5,150 $2,800 = $2,350 Cost = $2,350 + $4 (oil changes) Predicted cost for January = $2,350 + $4(1,000) = $6,350
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3.
Concluded
Output of the regression routine calculated by a spreadsheet: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. Rounding the coefficients: Variable rate = $4.65 per oil change Fixed cost = $1,697 Predicted cost for January = $1,697 + $4.65 (oil changes) = $1,697 + $4.65(1,000) = $6,347 R2 = 0.97 (rounded) This says that 97 percent of the variability in the cost of providing oil changes is explained by the number of oil changes performed. 4.64678 0.350304 1697.097 243.6784 0.967026 8 6
4.
The least-squares method is better because it uses all eight data points instead of just two.
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1.
Number of Moves
The scattergraph provides evidence for a linear relationship, but the observation for 300 moves may be an outlier. 2. High (800, $14,560); Low (100, $3,000) V = ($14,560 $3,000)/(800 100) = $11,560/700 = $16.51 per move (rounded) F = $3,000 $16.51(100) = $3,000 $1,651 = $1,349 Cost = $1,349 + $16.51 (moves) Predicted cost = $1,349 + $16.51(550) = $10,430 (rounded)
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3.
Concluded
Output of the regression routine calculated by a spreadsheet: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. Rounding the coefficients: Variable rate = $18.43 per move Fixed cost = $498 Cost = $498 + $18.43 (moves) = $498 + $18.43(550) = $10,635 (rounded) R2 = 0.93 (rounded) This says that 93 percent of the variability in the cost of moving materials is explained by the number of moves. 18.425 1.954566 497.50 987.0073 0.926208 8 6
4.
Normally, we would prefer the least-squares method since the data appear to be linear. However, the third observation may be an outlier. If the third obser2 vation (300 moves and $3,400 of cost) is dropped, the R rises to 99 percent. The new cost formula would be Cost = $1,411 + $17.28 (moves) The higher fixed cost is much more in keeping with what we observed with the scatterplot in requirement 1.
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1. 2. 3. Maintenance cost = $5,750 + $16X Maintenance cost = $5,750 + $16(650) = $5,750 + $10,400 = $16,150 To obtain the percentage explained, r needs to be squared: 0.89 0.89 = 79.21 percent. The relationship appears strong but perhaps could be improved by searching for another explanatory variable. Leaving about 20 percent of the variability unexplained may produce less than satisfactory predictions. Maintenance cost = 12($5,750) + $16(8,400) = $69,000 + $134,400 = $203,400
4.
Note: The fixed cost from the regression results is the fixed cost for the month (since monthly data were used to estimate the equation). However, the question asks for the cost for the year. Therefore, the fixed cost from the regression equation must be multiplied by 12.
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1. 2. Overhead = $2,130 + $17(DLH) + $810(setups) + $26(purchase orders) Overhead = $2,130 + $17(600) + $810(50) + $26(120) = $2,130 + $10,200 + $40,500 + $3,120 = $55,950 Since total setup cost is $40,500 for the following month, a 50 percent decrease would reduce setup cost to $20,250, saving $20,250 for the month.
3.
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1. Warranty repair cost = $2,000 + $60(number of defects) - $10(inspection hours) Warranty repair cost = $2,000 + $60(100) $10(150) = $6,500 The number of defects is positively correlated with warranty repair costs. Inspection hours are negatively correlated with warranty repair costs. In this equation, the independent variablesnumber of defects and inspection hoursaccount for 88 percent of the variability in warranty repair costs. It seems that analysts have identified some very good drivers for warranty repair costs.
2. 3.
4.
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PROBLEMS 3-20
a. Variable cost b. Committed fixed cost c. Discretionary fixed cost d. Discretionary fixed cost e. Discretionary fixed cost f. Variable cost g. Variable cost h. Discretionary fixed cost i. Discretionary fixed cost j. Committed fixed cost
3-21
1.
Yes, the relationship appears to be reasonably linear. 2. Using the high-low method: Variable receiving cost = ($27,000 $15,000)/(1,700 700) = $12 Fixed receiving cost = $15,000 $12(700) = $6,600 Predicted cost for 1,475 receiving orders: Receiving cost = $6,600 + $12(1,475) = $24,300 3. Receiving cost for the quarter = 3($6,600) + $12(4,650)
Receiving Cost
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= $19,800 + $55,800 = $75,600 Receiving cost for the year = 12($6,600) + $12(18,000) = $79,200 + $216,000 = $295,200 4. Receiving cost = $3,212 + $15.15 Number of receiving orders Receiving cost = $3,212 + $15.15(1,475) = $25,558 Receiving cost for the quarter = 3($3,212) + $15.15(4,650) = $9,636 + $70,448 = $80,084 Receiving cost for the year = 12($3,212) + $15.15(18,000) = $38,544 + $272,700 = $311,244 3-22 1. Results of regressions:
10 Months Data 12 Months Data Intercept 3,212.121 3,820 Slope 15.15152 15.10 0.8485 0.7451 R2
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2.
The point for the 11th month (1,200 receiving orders and $28,000 total receiving cost) appears to be an outlier. Since the cost was so much higher in this month due to an event that is not expected to happen again, this data point could easily be dropped. Then, data from the 11 remaining months could be used to develop a cost formula for receiving cost.
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3. Results for the method of least squares after dropping month 11.
SUMMARY OUTPUT Regression Statistics Multiple R 0.926737 R Square 0.858841 Adjusted R Square 0.843157 2051.781 Standard Error Observations 11 ANOVA df Regression Residual Total 1 9 10 Coefficients 3168.56 15.17946 SS 2.31E+08 37888233 2.68E+08 Standard Error 2565.262 2.051314 MS 2.31E+08 4209804 F 54.7581
Significance F
4.1E-05
Intercept X Variable 1
Receiving cost = $3,168.56 + $15.18 Number of receiving orders Predicted receiving cost for a month = $3,168.56 + $15.18(1,475) = $25,559.06 The regression run on the 11 months of data from typical months appears to be better than the one for all 12 months. R2 is higher for the regression without the outlier (85.88 percent versus 74.512 percent), and the scattergraph gives Joseph confidence that the data without the outlier describe a relatively linear relationship. Since the storm damage is not expected to recur, month 11 can safely be dropped from a regression meant to help predict future receiving cost.
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1. Salaries: Senior accountantfixed Office assistantfixed Internet and software subscriptionsmixed Consulting by senior partnervariable Depreciation (equipment)fixed Suppliesmixed Administrationfixed Rent (offices)fixed Utilitiesmixed Internet and software subscriptions: V = (Y2 Y1)/(X2 X1) = ($850 $700)/(150 120) = $5 per hour F = Y2 VX2 = $850 ($5)(150) = $100 Consulting by senior partner: V = (Y2 Y1)/(X2 X1) = ($1,500 $1,200)/(150 120) = $10 per hour F = Y2 VX2 = $1,500 ($10)(150) = $0 Supplies: V = (Y2 Y1)/(X2 X1) = ($1,100 $905)/(150 120) = $6.50 per hour F = Y2 VX2 = $1,100 ($6.50)(150) = $125 Utilities: V = (Y2 Y1)/(X2 X1) = ($365 $332)/(150 120) = $1.10 per hour F = Y2 VX2 = $365 ($1.10)(150) = $200
2.
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3.
Concluded
Unit Variable Cost $2,500 1,200 100 2,400 125 500 2,000 200 $9,025 $ 5.00 10.00 6.50 1.10 $22.60
Fixed Salaries: Senior accountant Office assistant Internet and subscriptions Consulting Depreciation (equipment) Supplies Administration Rent (offices) Utilities Total cost
Thus, total clinic cost = $9,025 + $22.60/professional hour For 140 professional hours: Clinic cost = $9,025 + $22.60(140) = $12,189 Charge per hour = $12,189/140 = $87.06 Fixed charge per hour = $9,025/140 = $64.46 Variable charge per hour = $22.60 4. For 170 professional hours: Charge/day = $9,025/170 + $22.60 = $53.09 + $22.60 = $75.69 The charge drops because the fixed costs are spread over more professional hours.
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1. High (1,700, $21,000); Low (700, $15,000) V = (Y2 Y1)/(X2 X1) = ($21,000 $15,000)/(1,700 700) = $6 per setup F = Y2 VX2 = $21,000 ($6)(1,700) = $10,800 Y = $10,800 + $6X 2. Output of spreadsheet regression routine with number of setups as the independent variable: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. 13.3766233766234 3.59557461331427 4512.98701298698 3456.24317476605 0.633710482694768 10 8
V = $13.38 per receiving order (rounded) F = $4,513 (rounded) Y = $4,513 + $13.38X R2 = 0.634, or 63.4% Setups explain about 63.4 percent of the variability in order filling cost, providing evidence that Bretts choice of a cost driver is reasonable. However, other drivers may need to be considered because 63.4 percent may not be strong enough to justify the use of only receiving orders.
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3.
Continued
Regression with setup hours as the independent variable: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. 4.49642991356633 7.32596 5632.28109733183 2390.10628259277 0.824833789433823 10 8
V = $4.50 per setup hour F = $5,632 (rounded) Y = $5,632 + $4.50X R2 = 0.825, or 82.5% Setup hours explain about 82.5 percent of the variability in order filling cost. This is a better result than that of setups and should convince Brett to try multiple regression.
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4.
Concluded
Regression routine with pounds of material and number of receiving orders as the independent variables: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. 3.33883151096915 0.495524841198368 752.104072925631 1350.46286973443 0.951068418023306 10 7 7.14702865269395 1.68182916088492
V1 V2 F Y
= $3.34 per pound of material delivered (rounded) = $7.147 per receiving order (rounded) = $752 (rounded) = $752 + $3.34a + $7.147b
R2 = 0.95, or 95% Multiple regression with both variables explains 95 percent of the variability in receiving cost. This is the best result.
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1. The order should cover the variable costs described in the cost formulas. These variable costs represent flexible resources. Materials ($94 20,000) Labor ($16 20,000) Variable overhead ($80 20,000) Variable selling ($7 20,000) Total additional resource spending Divided by units produced Total unit variable cost $1,880,000 320,000 1,600,000 140,000 $3,940,000 20,000 $ 197
Garner should accept the order because it would cover total variable costs and increase income by $15 per unit ($212 $197), for a total increase of $300,000.
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2.
Concluded
The correlation coefficients indicate the reliability of the cost formulas. Of the four formulas, overhead activity may be a problem. A correlation coefficient of 0.75 means that only about 75 percent of the variability on overhead cost is explained by direct labor hours. This should have a bearing on the answer to Requirement 1 because if the percentage is low, there are activity drivers other than direct labor hours that are affecting variability in overhead cost. What these drivers are and how resource spending would change need to be known before a sound decision can be made. Resource spending attributable to order: Material ($94 20,000) Labor ($16 20,000) Variable overhead: ($85 20,000) ($5,000 12) ($300 600) Variable selling ($7 20,000) Total additional resource spending Divided by units produced Total unit variable cost $ 1,880,000 320,000 1,700,000 60,000 180,000 140,000 $ 4,280,000 20,000 $ 214
3.
The order would not be accepted now because it does not cover the variable activity costs. Each unit would lose $2 ($212 $214). It would also be useful to know the step-cost functions for any activities that have resources acquired in advance of usage on a short-term basis. It is possible that there may not be enough unused activity capacity to handle the special order, and resource spending may also be affected by a need (which, in this case, would be unexpected) to expand activity capacity.
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1. High (2,000; $120,000); Low (1,200; $52,000) V = ($120,000 $52,000)/(2,000 1,200) = $85/nursing hour F = $52,000 ($85 1,200) = $50,000 This problem illustrates how the high-low method can be misleading when cost behavior patterns have changed. Fortunately, in this case, the negative value of fixed cost tells us that something is wrong. 2. a. Output of spreadsheet multiple regression routine: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. 40.8752113255057 2.2207348945557 236.211171346831 1788.59942408259 0.993939842186014 14 11 35307.5122042085 970.201096681915
b. Output of spreadsheet regression routine on 2008 data: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. 34.9533333333331 0.151087766637518 10081.3333333337 94.8068211329403 0.999887905585866 8 6
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Concluded
c. Output of spreadsheet regression routine on 2009 data: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. 50.0216788702923 0.0238700194326353 19964.2403242688 12.0521931978647 0.999999089146329 6 4
While each regression has a high R2, the multiple regression gives unacceptable results. Notice the $35,308 coefficient on the independent variable changes. Yet, the increased fixed cost was only $10,000 per month. Regression (c) gives more reasonable results. The intercept term, $19,964, is roughly $10,000 higher than the intercept term for Regression (b), as expected. So, the hospital should use Regression (c) to budget for the rest of the year.
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1. Output of spreadsheet regression with pounds as independent variable: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. Budgeted setup cost at 5,200 pounds: Y = $4,997.29 + $2.51(5,200) = $18,033.24 2.5069 0.257 4,997.2877 571.36 0.9315 9 7
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2.
Continued
Output of spreadsheet regression with number of orders as the independent variable: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. Budgeted setup cost for 160 orders: Y = $17,485.81 + $6.05(160) = $18,453.81 6.0507 19.718 17,485.8088 2168.03 0.01327 9 7
3.
The regression equation based on pounds is better because the coefficient of determination is much higher. Pounds explain about 93 percent of the variation in receiving costs, while number of orders explains only 1.3 percent of the variation in receiving costs.
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4.
Concluded
Output of spreadsheet for multiple regression: Constant Std. Err. of Y Est. R Squared No. of Observations Degrees of Freedom X Coefficient(s) Std. Err. of Coef. Y = $2,986.53 + $2.61(5,200) + $13.71(160) = $18,729.81 The explanatory power of both variables is very high. Yet, pounds seems to explain most of the variation, and the use of one driver would vastly simplify budgeting and product costing. The increased complexity is probably not worth adding the second driver. 2.6056 0.0453 2986.529 99.67 0.9982 9 6 13.7142 0.9163
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2.
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