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Problem 10-31

Ken Howard, financial analyst at KMW Corporation, is examining the behavior of quarterly maintenance costs
for budgeting purposes. Howard collects the following data on machine-hours worked and maintenance costs
for the past 12 quarters:

Quarter
1
2
3
4
5
6
7
8
9
10
11
12

Machine
Hours
100,000
120,000
110,000
130,000
95,000
115,000
105,000
125,000
105,000
125,000
115,000
140,000

Maintenance
Costs
$205,000
$240,000
$220,000
$260,000
$190,000
$235,000
$215,000
$255,000
$210,000
$245,000
$200,000
$280,000

1. Estimate the cost function for the quarterly data using the high-low method.

Total Cost
$280,000
$190,000
$90,000

Total Cost
H
$280,000
L
$190,000

Machine
Hours
140,000 High
95,000 Low
45,000
Total
Variable Costs
$280,000
$190,000

$2 VC per Machine Hour

Total
Fixed Costs
$0 No fixed costs
$0 No fixed costs

Cost Function: Y = $2 (Machine Hours)


2. Plot and comment on the estimated cost function.

Quarter
1
2
3
4
5
6
7
8
9
10

Machine
Hours
100,000
120,000
110,000
130,000
95,000
115,000
105,000
125,000
105,000
125,000

Actual
Maintenance
ACosts
$205,000
$240,000
$220,000
$260,000
$190,000
$235,000
$215,000
$255,000
$210,000
$245,000

Estimated
Maintenance
ECosts
$200,000
$240,000
$220,000
$260,000
$190,000
$230,000
$210,000
$250,000
$210,000
$250,000

Error
$5,000
$0
$0
$0
$0
$5,000
$5,000
$5,000
$0
($5,000)

11
12

115,000
140,000

$200,000
$280,000

$230,000
$280,000

($30,000)
$0

See P10-31(Chart)
There appears to be a clear-cut relationship between machine
hours and maintenance costs.
The high-low line appears to "fit" the data well. The vertical
differences between the actual and predicted costs appear
to be quite small.
3. Howard anticipates that KMW will operate machines for
100,000 hours in quarter 13. Calculate the predicted
maintenance costs in quarter 13 using the cost function
estimated in requirement 1.
Estimated maintenance costs = 100,000 X $2 = $200,000
90,000 hours?

aintenance costs
aintenance costs

Estimated Cost Function & Actual Costs


$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0
0

20,000

40,000

60,000

80,000

100,000

ACostsMachine Hours ECosts


Linear (ECosts)
Linear (ECosts)

120,000

140,000

160,000

Exercise 10-40

Fashion Bling operates a chain of 10 retail department stores. Each department store makes its own purchasing deci
Fashion Bling, is interested in better understanding the drivers of purchasing department costs. For many years, Fas
costs to products on the basis of the dollar value of merchandise purchased. A $100 item is allocated 10 times as ma
department as a $10 item.

Barry Lee recently attended a seminar titled "Cost Drivers in the Retail Industry." In a presentation at the seminar, a le
system reported that "number of purchase orders" and "number of suppliers" were the two most important cost drive
value of merchandise purchased in each purchase order was not found to be a significant cost driver. Barry Lee inter
Department at Fashion Bling's Miami store. They believed that the competitors conclusions regarding cost drivers fo
Department. Mr. Barry Lee collects the following data for the most recent year for Fashion Bling's 10 retail departmen

Department
Store
Baltimore
Chicago
LA
Miami
NYC
Phoenix
Seattle
St. Louis
Toronto
Vancouver

$ Value of
Merchandise
Purchased
(MP$)
$68,307,000
33,463,000
121,800,000
119,450,000
33,575,000
29,836,000
102,840,000
38,725,000
139,300,000
130,110,000

Number of
Purchase
Orders
(# of PO)
4,345
2,548
1,420
5,935
2,786
1,334
7,581
3,623
1,712
4,736

Number of
Suppliers
(# of S)
125
230
8
188
21
29
101
127
202
196

Lee decides to use simple regression analysis to examine whether one or more of three variables are reasonable cost
Summary results for these regressions are as follows:
Regression 1: PDC = a + (b X MP$)
SUMMARY OUTPUT
Regression 1 (MP$)

$2,500,000

Regression Statistics
Multiple R
0.651131304
R Square
0.423971975
Adjusted R Square
0.351968472
Standard Error
401027.6454
$2,000,000
Observations
10
ANOVA
Purchase Dept. Dollars

df
Regression
$1,500,000
Residual
Total

Intercept
$1,000,000
(# of PO)

SS
9.46961E+11
1.28659E+12
2.23355E+12

MS
9.46961E+11
1.60823E+11

Coefficients
Standard Error
730715.82
265418.8246
156.9660646
64.68655284

t Stat
2.753067048
2.426564065

1
8
9

Purchase Dept. Do

$500,000

$0
$0

$20,000,000

$40,000,000

$60,000,000
Dollar Value of Merchandise

SUMMARY OUTPUT
(Data tab; Data Analysis; Regression)
Regression Statistics: Regression 1
Multiple R
0.282507267
R Square
0.079810356
Adjusted R Square
-0.03521335
Standard Error
510,550.35
Observations
10

Regression 1: PDC = a + (b X MP$)


PDC = $1,041,421.37 + .003126704 (MP$)

2.60662E+11
ANOVA
df

SS
1.80863E+11
2.08529E+12
2.26616E+12

MS
1.80863E+11
2.60662E+11

Coefficients
Standard Error
1,041,421.366
346,708.547
0.003126704
0.003753624

t Stat
3.003737214
0.832982632

Regression
Residual
Total

Intercept
(MP$)

1
8
9

From a t-table for df=8 and one tail equal to .025 (95% confidence interval), the t-value is:
Therefore the intercept confidence intervals are:
And the b-coefficient confidence intervals are:
For a normal curve: "+/-" 1.64 standard errors for 90% confidence interval.
For a normal curve: "+/-" 1.96 standard errors for 95% confidence interval.
For a normal curve: "+/-" 2.58 standard errors for 99% confidence interval.

Evaluation of the information:


Criterion
1. Economic Plausibility

2. Goodness of fit
3. Significance of "X" Variable

Regression 1: MP$

A leading competitor found little support for MP$ as a signific


Purchasing personnel at the Miami store also believe MP$ is n
r2 = 0.0798 indicates a poor fit.

t-value of 0.832982632 is insignificant; the larger the t-value th

From a t-table for df=8 and one tail equal to .025 (95% confidence int

4. Specification Analysis: The testing of the assumptions of regression analysis

pg. 369

A. Linearity within the relevant range

A straight line relationship appears questionable within the relevant

B. Constant variance of residuals

Appears questionable, but no strong evidence against constant vari


Constant variance is called homoscedasticity; violation if this assum
This assumption implies that the residual terms are unaffected by th
This assumption also implies that there is a uniform scatter, or dispe

regression line. (See Exhibit 10-15, Panels A&B pg. 370.)


C. Independence of residuals

Durbin-Watson Statistic = 2.41 (Assumption of independence is not


For samples of 10-20 observations, a D/W statistic in the range of 1.1
that the residuals are independent.

D. Normality of residuals

Too few data points to make reliable inferences.

Regression 2: PDC = a + (b X (# of PO))


Regression 2 (Number of Purchase Orders)

$2,500,000

Purchase Dept. Dollars

$2,000,000

$1,500,000

$1,000,000

$500,000

$0
0

1,000

2,000

3,000
Number of Purchase Orders

SUMMARY OUTPUT
Regression Statistics: Regression 2

Regression 2: PDC = a + (b X (# of PO))


PDC = $722,537.85 + $159.48 (# of PO)

Multiple R
R Square
Adjusted R Square
Standard Error
Observations

0.656228523
0.430635874
0.359465358
401601.1595
10
1.61283E+11

ANOVA
df

SS
9.75888E+11
1.29027E+12
2.26616E+12

MS
9.75888E+11
1.61283E+11

Coefficients
Standard Error
722537.851
265834.6274
159.4842168
64.83547006

t Stat
2.717997494
2.459829731

Regression
Residual
Total

1
8
9

Intercept
(# of PO)

From a t-table for df=8 and one tail equal to .025 (95% confidence interval), the t-value is:
Therefore the intercept confidence intervals are:
And the b-coefficient confidence intervals are:
For a normal curve: "+/-" 1.64 standard errors for 90% confidence interval.
For a normal curve: "+/-" 1.96 standard errors for 95% confidence interval.
For a normal curve: "+/-" 2.58 standard errors for 99% confidence interval.

Evaluation of the information:

Regression 2: # of PO

Criterion
1. Economic Plausibility

Economically plausible. Increasing the number of purchase o

2. Goodness of fit

r2 = 0.430635874 indicates a reasonable fit.

3. Significance of "X" Variable

t-value of 2.459829731 is significant; the larger the t-value the

4. Specification Analysis: The testing of the assumptions of regression analysis


pg. 369

A. Linearity within the relevant range

Appears reasonable (See Scatter diagram)

B. Constant variance of residuals

Appears reasonable

C. Independence of residuals

Durbin-Watson Statistic = 1.97 (Assumption of independence is not


For samples of 10-20 observations, a D/W statistic in the range of 1.1
that the residuals are independent.

D. Normality of residuals

Too few data points to make reliable inferences.

Regression 3: PDC = a + (b X (# of S))

$2,500,000

Regression 3 (Number of Suppliers)

Purchase Dept. Dollars

$2,000,000

$1,500,000

$1,000,000

$500,000

$0

50

100

SUMMARY OUTPUT

Regression 3: PDC = a + (b X (# of S))


PDC = $828,814.24 + $3,815.69 (# of S)

Regression Statistics
Multiple R
0.621971696
R Square
0.386848791
Adjusted R Square
0.310204889
Standard Error
416757.7672
Observations
10
1.73687E+11
ANOVA
df
Regression
Residual
Total

Intercept
(# of S)

SS
8.7666E+11
1.3895E+12
2.26616E+12

MS
8.7666E+11
1.73687E+11

Coefficients
Standard Error
828814.2417
246570.4694
3815.694852
1698.407173

t Stat
3.361368633
2.24663138

1
8
9

From a t-table for df=8 and one tail equal to .025 (95% confidence interval), the t-value is:
Therefore the intercept confidence intervals are:
And the b-coefficient confidence intervals are:

For a normal curve: "+/-" 1.64 standard errors for 90% confidence interval.
For a normal curve: "+/-" 1.96 standard errors for 95% confidence interval.
For a normal curve: "+/-" 2.58 standard errors for 99% confidence interval.

Evaluation of the information:


Criterion
1. Economic Plausibility

Regression 3: # of Suppliers

Economically plausible. Increasing the number of suppliers in


the Fashion Bling-supplier relationships.

2. Goodness of fit

r2 = 0.386848791 indicates a reasonable fit.

3. Significance of "X" Variable

t-value of 2.24663138 is significant.

4. Specification Analysis
A. Linearity within the
relevant range

Appears reasonable (See Scatter diagram)

B. Constant variance of residuals

Appears reasonable.

C. Independence of residuals

Durbin-Watson Statistic = 2.01 (Assumption of independence


For samples of 10-20 observations, a D/W statistic in the rang
that the residuals are independent.

D. Normality of residuals

Too few data points to make reliable inferences.

2. Do the regression results support the competitor's presentation about the purchasing department's cost drivers?

Fashion Bling can either (a) develop a multiple regression equation for estimating purchasing departme
suppliers as cost allocation bases, or (2) divide the purchasing department cost pool into two separate
and another for costs related to suppliers, and estimate a separate simple regression equation for each
3. How might Lee gain additional evidence on drivers of Purchasing Department costs at each store?
a. Use physical relationships or engineering relationships to establish cause-and-effect links.
Lee could observe the purchasing department operations to gain insight into how costs are driven.

b. Use knowledge of operations.


Lee could interview operating personnel in the purchasing department to obtain their insight on cost

Exercise 10-41
Barry Lee decides that the simple regression analysis used in P10-40 could be extended to a multiple regression analy
Regression 4: PDC = a + (b1)(# of PO) + (b2)(# of S)
SUMMARY OUTPUT
Regression Statistics: Regression 4
Multiple R
0.797723096

PDC = $484,521.6364 + $126.6639997 (# of PO) + $2903.2977

R Square
Adjusted R Square
Standard Error
Observations

0.636362138
0.532465606
343107.6721
10

7.21048E+11
1.17723E+11

ANOVA
df

SS
1.4421E+12
8.2406E+11
2.26616E+12

MS
7.21048E+11
1.17723E+11

Coefficients
Standard Error
484521.6346
256684.0955
126.6639997
57.7952084
2903.297788
1458.922564

t Stat
1.887618451
2.191600362
1.99002871

Regression
Residual
Total

Intercept
(# of PO)
(# of S)

2
7
9

From a t-table for df=7 and one tail equal to .025 (95% confidence interval), the t-value is:
Therefore the intercept confidence intervals is:
And the b-coefficient confidence intervals are:
Number of purchase orders
Number of Suppliers
For a normal curve: "+/-" 1.64 standard errors for 90% confidence interval.
For a normal curve: "+/-" 1.96 standard errors for 95% confidence interval.
For a normal curve: "+/-" 2.58 standard errors for 99% confidence interval.

Evaluation of the information:


Criterion
1. Economic Plausibility

Regression 4: PDC = a + (b1)(# of PO) + (b2)(# of S)

Economically plausible. Both independent variables are plaus


the findings of the competitor's research and Bling's own rese

2. Goodness of fit

r2 = 0.636362138 indicates an excellent fit.

3. Significance of "X" Variables

t-value of 2.19 is significant for the (# of PO) variable


t-value of 1.99 is nearly significant for the (# of S) variable

4. Specification Analysis
A. Linearity within the
relevant range

Appears reasonable.

B. Constant variance of residuals

Appears reasonable.

C. Independence of residuals

Durbin-Watson Statistic = 1.91 (Assumption of independence

D. Normality of residuals

Too few data points to make reliable inferences.

1. Compare regression 4 with regression 2 and 3 in Problem 10-40. Which model would you recommend that Lee use
Regression 4 is economically feasible and has the highest r2 value. Lee should use the results from

regression 4 to predict PDC.

Regression 5: PDC = a + (b1 X (# of PO)) + (b2 X (# of S)) + (b3 X MP$)


SUMMARY OUTPUT

PDC = $483,559.95 + $126.5778427 (# of PO) + $2,900.7309 (# of S) + -.000194148

Regression Statistics: Regression 5


Multiple R
0.797724783
R Square
0.63636483
Adjusted R Square
0.454547245
Standard Error
370597.2708
Observations
10

4.80701E+11
1.37342E+11

ANOVA
df
Regression
Residual
Total

Intercept
(MP$)
(# of PO)
(# of S)

SS
1.4421E+12
8.24054E+11
2.26616E+12

MS
4.80701E+11
1.37342E+11

Coefficients
Standard Error
483559.9493
312554.2588
0.0000194148
0.002913205
126.5778427
63.75031137
2900.7309
1622.198995

t Stat
1.547123214
0.006664422
1.985525089
1.788147391

3
6
9

From a t-table for df=6 and one tail equal to .025 (95% confidence interval), the t-value is:
Therefore the intercept confidence intervals is:
And the b-coefficient confidence intervals are:
Dollars of Merchandise Purchased
Number of purchase orders
Number of Suppliers
For a normal curve: "+/-" 1.64 standard errors for 90% confidence interval.
For a normal curve: "+/-" 1.96 standard errors for 95% confidence interval.
For a normal curve: "+/-" 2.58 standard errors for 99% confidence interval.

2. Compare regression 5 with regression 4. Which model would you recommend that Lee use?

Regression 4 should be used.


It is slightly less complicated (and therefore less costly), has about the same r2, and the standard errors
regression variables are slightly smaller.
3. Lee estimates the following data for the Baltimore store for next year:
Dollar value of merchandise purchased
Number of purchase orders
Number of suppliers

$75,000,000
4,000
95

Regression 4: PDC = a + (b1)(# of PO) + (b2)(# of S)


PDC = $484,521.6364 + $126.6639997 (# of PO) + $2903.297788 (# of S)

PDC =

$1,266,990.92 Slightly preferred -- see above.

Regression 5: PDC = a + (b1)(# of PO) + (b2)(# of S) + (b3)(MP$)


PDC = $483,559.95 + $126.5778427 (# of PO) + $2,900.7309 (# of S) + .000194148 (MP$)
PDC =

$1,266,896.87 More complicated, more costly, not much improvement.

4. What difficulties do not arise in simple regression analysis that may arise in multiple regression analysis?
Multicollinearity is a frequently encountered problem in cost accounting; it does not arise in simple reg
because there is only one independent variable in a simple regression. Multicollinearity exists when tw
more independent variables are highly correlated with each other.

One consequence of multicollinearity is an increase in the standard errors of the coefficients of the indi
variables. This frequently shows up in reduced t-values for the independent variables in the multiple
regression relative to their t-values in the simple regression.

Variables
Regression 4
# of PO
# of S
Regression 5
# of PO
# of S
MP$

t-value
Multiple
Regression

t-value
Simple
Regression

2.191600362
1.99002871

2.459829731
2.24663138

1.985525089
1.788147391
0.006664422

2.459829731
2.24663138
0.832982632

The decline in the t-values in the multiple regressions is consistent with some (but not very high)
collinearity among the independent variables.

Generally, users of regression analysis believe that a coefficient of correlation between independent va
greater than 0.70 indicates multicollinearity.
The coefficients of correlation between the potential independent variables for Fashion Bling are:
Pair-wise
Correlation Values

# of PO / # of S
# of PO / MP$
# of S / MP$

0.285358
0.270157
0.296190

# of PO
# of Suppliers
MP$
# of PO

No values are near the .70 benchmark.


MP$
# of Suppliers
Excel path:
Data, Data Analysis, Correlation, OK

(MP$)
(MP$)
(# of PO)
(# of S)
(PDC)

1
0.270157066
0.296190300
0.282507267

(# of PO)
1
0.285358146
0.656228523

(# of S)

1
0.621971696

5. Give examples of decisions in which the regression results reported here could be informative.
Cost management decisions: Fashion Bling could restructure relationships with suppliers so that
fewer separate purchase orders are made. Alternatively, it may aggressively reduce the number
of existing suppliers.
Purchasing policy decisions: Fashion Bling could set up an internal charge system for individual
retail departments within each store. Separate charges to each department could be made for each
purchase order and each new supplier added to the existing ones. These internal charges would
signal to each department ways in which their own decisions affect the total costs of Fashion Bling.
Account system design decisions: Fashion Bling may want to discontinue allocating purchasing
department costs on the basis of dollar value of merchandise purchased. Allocation bases better
capturing cause-and-effect relations at Fashion Bling are the number of purchase orders and the
number of suppliers.

nt store makes its own purchasing decisions. Barry Lee, assistant to the president of
department costs. For many years, Fashion Bling has allocated purchasing department
A $100 item is allocated 10 times as many overhead costs associated with the purchasing

y." In a presentation at the seminar, a leading competitor that has implemented an ABC
were the two most important cost drivers of purchasing department costs. The dollar
a significant cost driver. Barry Lee interviewed several members of the Purchasing
s conclusions regarding cost drivers for purchasing costs also applied to their Purchasing
r for Fashion Bling's 10 retail department stores:
Purchasing
Department
Costs
(PDC)
$1,522,000
1,095,000
542,000
2,053,000
1,068,000
517,000
1,544,000
1,761,000
1,605,000
1,263,000

$ Value of
Merchandise
Purchased
(MP$)
$68,307,000
33,463,000
121,800,000
119,450,000
33,575,000
29,836,000
102,840,000
38,725,000
139,300,000
130,110,000

Number of
Suppliers
(# of S)
125
230
8
188
21
29
101
127
202
196

re of three variables are reasonable cost drivers of purchasing department costs.

Regression 1 (MP$)

F
5.888213164

Significance F
0.041423692

P-value
0.024940453
0.041423692

Lower 95%
118658.5171
7.798509836

Upper 95%
1342773.123
306.1336195

Lower 95.0%
118658.5171
7.798509836

Upper 95.0%
1342773.123
306.1336195

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

Dollar Value of Merchandise

ession 1: PDC = a + (b X MP$)


= $1,041,421.37 + .003126704 (MP$)
Intercept
Slope
R2

0.693860065
F
0.693860065

Significance F
0.429019986

P-value
0.016974731
0.429019986

Lower 95%
241,910.0229
-0.005529169

5 (95% confidence interval), the t-value is:


241,910.0223
(0.005529169)

or 90% confidence interval.


or 95% confidence interval.
or 99% confidence interval.

260,661,660,427.11
$510,550.35
Std. error of the regression
On average, actual Y and the predicted y differ by this amoun
The smaller the std. error the better the goodness of fit

Upper 95%
1,840,932.7095
0.011782576

3.003737214
0.832982632

2.306004135
1,840,932.7102
0.011782576

1.644853627
1.959963985
2.575829304

found little support for MP$ as a significant driver.


l at the Miami store also believe MP$ is not a significant driver.
(r2 >.30 passes).

0.079810356

2 is insignificant; the larger the t-value the better

nd one tail equal to .025 (95% confidence interval), the t-value is:

gression analysis

1,041,421.366
0.003126704
0.079810356
0.282507267

2.306004135

3.003737225
0.832982631

hip appears questionable within the relevant range. (See Scatter diagram)

but no strong evidence against constant variance.


led homoscedasticity; violation if this assumption is called heteroscedasticity.
s that the residual terms are unaffected by the level of the cost driver.
mplies that there is a uniform scatter, or dispersion, of the data points about the

Exhibit 10-15, Panels A&B pg. 370.)

= 2.41 (Assumption of independence is not rejected.)


servations, a D/W statistic in the range of 1.10 - 2.90 range indicates

make reliable inferences.

ession 2 (Number of Purchase Orders)

4,000

5,000

6,000

7,000

Number of Purchase Orders

ession 2: PDC = a + (b X (# of PO))


= $722,537.85 + $159.48 (# of PO)
R2

0.430635874

8,000

Slope
Intercept

159.4842168
722537.851

6.050762303
F
6.050762303

Significance F
0.039329201
2.717997494
2.459829731

P-value
0.026330178
0.039329201

Lower 95%
109522.1014
9.973354903

5 (95% confidence interval), the t-value is:


109,522.1009
9.973354779

or 90% confidence interval.


or 95% confidence interval.
or 99% confidence interval.

Upper 95%
1335553.6
308.9950788
2.306004135
1,335,553.6
308.9950789

1.644853627
1.959963985
2.575829304

le. Increasing the number of purchase orders increases the purchasing tasks to be undertaken.

ates a reasonable fit.

(r2 >.30 passes).

0.430635874

1 is significant; the larger the t-value the better

gression analysis

e Scatter diagram)

= 1.97 (Assumption of independence is not rejected.)


servations, a D/W statistic in the range of 1.10 - 2.90 range indicates

make reliable inferences.

egression 3 (Number of Suppliers)

150

200

250

Number of Suppliers

ession 3: PDC = a + (b X (# of S))


= $828,814.24 + $3,815.69 (# of S)
R2
Slope
Intercept

0.386848791
3815.694852
828814.2417

5.047352558
F
5.047352558

Significance F
0.054854897
3.361368633
2.24663138

P-value
0.00991164
0.054854897

Lower 95%
260221.7201
-100.8391101

5 (95% confidence interval), the t-value is:


260,221.7197
(100.8391133)

Upper 95%
1397406.763
7732.228814
2.306004135
1,397,406.764
7,732.228817

or 90% confidence interval.


or 95% confidence interval.
or 99% confidence interval.

1.644853627
1.959963985
2.575829304

le. Increasing the number of suppliers increases the costs of certifying vendors and managing
pplier relationships.

ates a reasonable fit.

(r2 >.30 passes).

0.386848791

is significant.

See Scatter diagram)

tic = 2.01 (Assumption of independence is not rejected.)


observations, a D/W statistic in the range of 1.10 - 2.90 range indicates
independent.

o make reliable inferences.

purchasing department's cost drivers?

Yes. (See above analysis.)

tion for estimating purchasing department costs with the # of purchasee orders and the # of
department cost pool into two separate cost pools, one for costs related to purchase orders
ate simple regression equation for each pool using the appropriate cost drive.

ent costs at each store?

stablish cause-and-effect links.


gain insight into how costs are driven.

epartment to obtain their insight on cost drivers.

e extended to a multiple regression analysis.

64 + $126.6639997 (# of PO) + $2903.297788 (# of S)

343107.6721
6.124960342

F
6.124960342

Significance F
0.02899625

P-value
0.10102841
0.064526149
0.08688758

Lower 95%
-122439.8024
-9.999951709
-546.5058866

5 (95% confidence interval), the t-value is:


confidence intervals is:
(122,439.8025)
nfidence intervals are:
ber of purchase orders
(9.999951746)
ber of Suppliers
(546.505887535)

or 90% confidence interval.


or 95% confidence interval.
or 99% confidence interval.

Upper 95%
1091483.072
263.327951
6353.101463
2.364624252
1,091,483.072
263.327951
6,353.101464

1.644853627
1.959963985
2.575829304

a + (b1)(# of PO) + (b2)(# of S)

le. Both independent variables are plausible and are supported by


mpetitor's research and Bling's own research.

ates an excellent fit.

(r2 >.30 passes).

ficant for the (# of PO) variable


y significant for the (# of S) variable

tic = 1.91 (Assumption of independence is not rejected.)

o make reliable inferences.

odel would you recommend that Lee use?

lue. Lee should use the results from

1.887618451
2.191600362
1.99002871

PO) + $2,900.7309 (# of S) + -.000194148 (MP$)

3.500018051

F
3.500018051

Significance F
0.089598866

P-value
0.172797006
0.994898658
0.094299047
0.123970458

Lower 95%
-281232.7692
-0.007108942
-29.41354943
-1068.647038

Upper 95%
1248352.668
0.007147771
282.5692348
6870.108839

5 (95% confidence interval), the t-value is:


confidence intervals is:
(281,232.7707)
nfidence intervals are:
rs of Merchandise Purchased
(0.007108942)
ber of purchase orders
(29.413549733)
ber of Suppliers
(1,068.647046)

2.446911851

or 90% confidence interval.


or 95% confidence interval.
or 99% confidence interval.

1.644853627
1.959963985
2.575829304

end that Lee use?

out the same r2, and the standard errors around the

1.547123214
0.006664422
1.985525089
1.788147391

1,248,352.669
0.007147771
282.5692351
6,870.108846

of S) + .000194148 (MP$)

ore costly, not much improvement.

n multiple regression analysis?


counting; it does not arise in simple regression
ession. Multicollinearity exists when two or

dard errors of the coefficients of the individual


independent variables in the multiple

tent with some (but not very high)

t of correlation between independent variables

nt variables for Fashion Bling are:


# of PO
1
0.285358146
MP$
1
0.270157066
MP$
1
0.296190300

# of Suppliers
0.285358146
1
# of PO
0.270157066
1
# of Suppliers
0.296190300
1

(PDC)

ould be informative.
elationships with suppliers so that
aggressively reduce the number

ernal charge system for individual


department could be made for each
es. These internal charges would
fect the total costs of Fashion Bling.

discontinue allocating purchasing


urchased. Allocation bases better
umber of purchase orders and the

0.282507267

the regression
predicted y differ by this amount.
the better the goodness of fit

0.016974731
0.429019985

Problem 10-36
The Nautilus Company, which is under contract to the U.S. Navy, assembles troop deployment boats.
As part of its research program, it completes the assembly of the first of a new model (PT109) of
deployment boat. The Navy is impressed with the PT109. It requests that Nautilus submit a proposal
on the cost of producing another 6 PT109s.
Nautilus reports the following cost information for the first PT109 assembled and uses an 90%
cumulative average-time learning model as a basis for forecasting direct manufacturing labor-hours
for the next 6 PT109s. (An 90% learning curve means b = -0.152004.)
Direct materials
Direct manufacturing labor time for first boat
Direct manufacturing labor rate
Variable manufacturing overhead cost
Other manufacturing overhead
Tooling costs (1)
Learning curve for manufacturing labor time per boat

$200,000
15,000
$40
$25
20%
$280,000
90%

labor-hours
per direct manufacturing labor-hour
per direct manufacturing labor-hour
of direct manufacturing labor costs
cumulative average time (2)

(1) Tooling can be reused at no extra cost; all of its cost have been assigned to the first deployment boat.
(2) Using the formula (p. 359), for an 90% learning curve, b = ln.90/ln2 = (-0.105361/.693147) = -0.152004
Required:
1. Calculate predicted total costs of producing the six PT109s for the Navy. (Nautilus will keep the first
deployment boat assembled, costed at $1,575,000, as a demonstration model for potential customers.)
Calculation of the direct manufacturing labor-hours
to produce the 2nd to 8th boats can be calculated
as follows: y = aX to the power of b where
y = cumulative average time per unit in labor-hours
a = labor hours required for first unit
X = cumulative number of units
b = ln(learning-curve % in decimal form) / ln2
b = ln 0.90 / ln2 = -0.152003093
-0.105360516
0.693147181
-0.152003093

b=

y=aXb

Extra unit

-0.152003093
Cumulative
# of
Units
1
2
3
4
5
6
7
8

The DLHs required to produce the 2nd through the 7th boats

Cost to produce the 2nd through 7th boats


Direct materials, 6 X $200,000
Direct manufacturing labor (DML)
Variable mfg. Overhead
Other mfg. Overhead (20% of DML$)
Total costs for boats 2 through 7

Cumulative
Average-time
Learning Model
1,200,000.00
2,524,580.90
1,577,863.06
504,916.18
$5,807,360.15

2. What is the dollar amount of the difference between (a) the predicted total costs for producing the
six PT109s in requirement 1, and (b) the predicted total costs for producing the six PT109s,

assuming that there is no learning curve for direct manufacturing labor? That is, for (b) assume a
linear function for units produced and direct manufacturing labor-hours.
Assumption
(a)
63,114.52

Cost to produce the 2nd through 7th boats


Direct labor hours required based on assumption

Learning Curve
$1,200,000.00
2,524,580.90
1,577,863.06
504,916.18
$5,807,360.15

Direct materials, 6 X $200,000


Direct manufacturing labor (DML)
Variable mfg. Overhead
Other mfg. Overhead (20% of DML$)
Total costs for boats 2 through 7
Difference

Learning curve effects are most prevalent in large manufacturing industries such as airplanes and
boats where costs can run into the millions or hundreds of millions of dollars, resulting in very large
and monetarily significant differences between the two methods.

Problem 10-37
Assume the same information for the Nautilus Company as in Problem 10-36 with one exception. This exception is th
Nautilus uses an 90% incremental unit-time learning model as a basis for predicting direct manufacturing labor-hours
in its assembling operations.
1. Calculate predicted total costs of producing the 6 additional PT109s for the Navy. (Nautilus will keep the first
deployment boat assembled, costed at $1,575,000, as a demonstration model for potential customers.)
Calculation of the direct manufacturing labor-hours
to produce the 2nd to 7th boats can be calculated
as follows: y = aX to the power of b where
y = Time (in labor-hours) to produce the most recent unit
a = labor hours required for first unit
X = cumulative number of units
b = ln(learning-curve % in decimal form) / ln2
b = ln 0.90 / ln2 = -0.152003093
-0.105360516
0.693147181
-0.152003093

b=

y=aXb

Extra unit

-0.15200309
Cumulative
# of
Units
1
2
3
4
5
6
7
8

The DLHs required to produce the 2nd through the 7th boats

Cost to produce the 2nd through 7th boats


Direct materials, 6 X $200,000
Direct manufacturing labor (DML)
Variable mfg. Overhead
Other mfg. Overhead (20% of DML$)

Incremental
Unit-time Learning
Model
$1,200,000.00
2,906,835.56
1,816,772.22
581,367.11

Total costs for boats 2 through 7

$6,504,974.89

2. Compare the cost of the 2nd - 7th boats using the "Incremental Unit-time Learning Model" with the costs of the 2nd
boats using the "Cumulative Average-time Learning Model:
Incremental
Unit-time Learning
Cost to produce the 2nd through 7th boats
Model
Direct materials, 6 X $200,000
$1,200,000.00
Direct manufacturing labor (DML)
2,906,835.56
Variable mfg. Overhead
1,816,772.22
Other mfg. Overhead (20% of DML$)
581,367.11
Total costs for boats 2 through 7
$6,504,974.89
Difference
Why are the predictions different?

The incremental unit-time learning curve has a slower rate of decline in the time required to produce successive un
than does the cumulative average-time learning curve even though the same 90% factor is used for both curves.
The reason is that, in the incremental unit-time learning model, as the number of units double, only the last unit
produced has a time of 90% of the initial time. In the cumulative average-time learning model, doubling the numbe
of units causes the average time of all the additional units produced (not just the last unit) to be 90% of the initial ti

Cumulative
# of
Units
1
2
3
4
5
6
7
8
How should Nautilus decide which model it should use?

The company should examine its own internal records on past jobs and seek information from engineers, plant managers, and
when deciding which learning curve better describes the behavior of direct manufacturing labor-hours on the production of the
boats.

deployment boats.
del (PT109) of
submit a proposal

uring labor-hours

manufacturing labor-hour
manufacturing labor-hour
manufacturing labor costs

ve average time (2)

e first deployment boat.


.693147) = -0.152004

us will keep the first


r potential customers.)
90% LC
Average
Time per
Unit (y):
Labor-Hrs.
15,000.00
13,500.00
12,693.09
12,150.00
11,744.80
11,423.78
11,159.22
10,935.00

s for producing the


six PT109s,

0.9000
0.9402
0.9572
0.9667
0.9727
0.9768
0.9799
90% LC
Average
Time per
Cumulative
Unit (y):
Total Time:
Labor-Hrs.
Labor-Hrs.
15,000.00
15,000.00
13,500.00
27,000.00
38,079.27
12,150.00
48,600.00
58,724.00
68,542.68
78,114.52
10,935.00
87,480.00
63,114.52

s, for (b) assume a

Assumption
(b)
90,000.00
No
Learning Curve
$1,200,000.00
3,600,000.00
2,250,000.00
720,000.00
$7,770,000.00
$1,962,639.85

Proof
$7,770,000.00

h as airplanes and
esulting in very large

ne exception. This exception is that


g direct manufacturing labor-hours

y. (Nautilus will keep the first


r potential customers.)
90% LC
Incremental
Unit Time for
Xth Unit (y)
Labor-Hrs.
15,000.00
13,500.00
12,693.09
12,150.00
11,744.80
11,423.78
11,159.22
10,935.00

0.90
90% LC
Incremental
Unit Time for
Cumulative
Xth Unit (y)
Total Time:
Labor-Hrs.
Labor-Hrs.
15,000.00
15,000.00
13,500.00
28,500.00
41,193.09
12,150.00
53,343.09
65,087.89
76,511.67
87,670.89
10,935.00
98,605.89
72,670.89

ng Model" with the costs of the 2nd - 7th


Cumulative
Average-time
Learning Model
$1,200,000.00
2,524,580.90
1,577,863.06
504,916.18
$5,807,360.15
($697,614.75)

required to produce successive units


% factor is used for both curves.
f units double, only the last unit
arning model, doubling the number
e last unit) to be 90% of the initial time.
Cumulative
Average-time
Learning Model
Cumulative
Total Time:
Labor-Hrs.
15,000.00
27,000.00
38,079.27
48,600.00
58,724.00
68,542.68
78,114.52
87,480.00

Incremental
Unit-time Learning
Model
Cumulative
Total Time:
Labor-Hrs.
15,000.00
28,500.00
41,193.09
53,343.09
65,087.89
76,511.67
87,670.89
98,605.89

n from engineers, plant managers, and workers


ng labor-hours on the production of the PT109

Observation
1
2
3
4
5
6
7
8
9
10
Total
Mean

b-value
Intercept
Formula

X
6
10
8
11
5
12
9
7
4
14
86

Y
22
34
29
40
19
45
30
25
18
48

Hi-Low Method
Y

48
18
30

310

31
Hi-Low

Regression

3
6
y = 6 + 3X

3.268398268
2.891774892
y=2.891774892+ 3.268398268(X)

3.268398268
2.891774892

SUMMARY OUTPUT (Shadded Yellow)


Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

0.988576473
0.977283443
0.974443873
1.693506825
10

0.977283443

0.977283443

0.977283443

1
8
9

SS
987.0562771
22.94372294
1010

MS
987.0562771
2.867965368

F
344.1660377

Coefficients
2.891774892
3.268398268

Standard Error
1.606987982
0.176177712

t Stat
1.799500011
18.55171253
1.799500011
18.55171253

P-value
0.109636756
7.34874E-08

ANOVA
df
Regression
Residual
Total

Intercept
X

Hi-Low

Actual value of Y when X is equal to 12 =


Best quess of Y, with knowledge of X equal to 12, is
Best quess of Y, with no knowledge of X, is the mean
Total Variation from the mean when X is = to 12
Explained Variation by knowing X is equal to 12
Unexplained Variation when X is equal to 12

45
42

45 - 31 =
42 - 31 =
45 - 42 =

31
14
11
3

RESIDUAL OUTPUT (Regression)


Observation #
1
2
3
4
5
6
7
8
9
10
Total

X
6
10
8
11
5
12
9
7
4
14

Y
22
34
29
40
19
45
30
25
18
48
310

31

Regression

Explained by X

Predicted Y

Residuals

22.5021645

-8.497835498

35.57575758

4.575757576

29.03896104

-1.961038961

38.84415584

7.844155844

19.23376623

-11.76623377

42.11255411

11.11255411

32.30735931

1.307359307

25.77056277

-5.229437229

15.96536797

-15.03463203

48.64935065
310

17.64935065
0.000000000

31

60

50

Hi-Low Method
X

14
4
10

40

30

20

10

0
0
Significance F
7.34874E-08

Lower 95%
-0.813946037
2.862131736

Upper 95%
6.597495821
3.674664801

344.1660377
987.0562771
1.693506825
2.867965368
1.693506825
see pg. 368 Std. error of the regression
2.306004135 = T-value for df =8
-0.813946040
6.597495824
2.862131736
3.674664801

Regression

45

2.575829304

42.11255411

1.959963985

31
14
11.11255411
2.887445887

42.11233411 - 31
45 - 42.11255411

Unexplained
Squared

Residuals

Squared

Total Variation

Total Variation

Squared

72.21320815

-0.502164502

0.252169187

-9

-9

81

20.93755739

-1.575757576

2.483011938

3.845673807

-0.038961039

0.001517963

-2

-2

61.53078091

1.155844156

1.335975713

81

138.444257

-0.233766234

0.054646652

-12

-12

144

123.4888589

2.887445887

8.337343753

14

14

196

1.709188359

-2.307359307

5.323906973

-1

-1

27.34701374

-0.770562771

0.593766983

-6

-6

36

226.0401604

2.034632035

4.139727516

-13

-13

169

311.4995783
987.0562771

-0.649350649
0.000000000

0.421656266
22.94372294

17
0

17
0

289
1010

0.977283443
0.977283443
0.977283443
0.977283443
0.977283443
r= 0.988576473
r= 0.988576473

1010

Graph -- Data

8
x

10

12

12

14

16

Anna Martinez is checking to see if there is any relationship between newspaper


advertising and sales revenue at the Casa Real restaurant where she is the financial
manager. She has obtained the following data for the past 10 months:

Month
Revenues
March
$50,000
April
$70,000
May
$55,000
June
$65,000
July
$56,000
August
$65,000
September
$45,000
October
$80,000
November
$55,000
December
$60,000

Advertising
Costs
$2,000
$3,000
$1,500
$3,500
$1,000
$2,000
$1,500
$4,000
$2,500
$2,500

Using the high-low method, determine the cost function which could
be used to estimate restaurant revenues based on advertising costs.

2
2
2
2

Revenues
$80,000
$56,000
$24,000

Costs
$4,000
$1,000
$3,000

$8.00

$80,000
$56,000

$32,000
$8,000

$48,000
$48,000

2 Y = $48,000 + ($8.00 X Advertising Costs)

Cook Company provides you with the following original data for the past 12 months and some partial
regression analysis information:
Observation (Month)
DL Hours
January
27,750
February
24,150
March
20,835
April
16,170
May
15,000
June
19,050
July
20,850
August
22,500
September
25,650
October
28,500
November
32,250
December
33,000
Total
285,705
Mean
$23,808.75
Regression Statistics
Coefficients
Intercept
29654.03669
DL Hours
0.689807878
Observation (Month)
January
February
March
April
May
June
July
August
September
October
November
December
Total

Observation
1
2
3
4
5
6
7
8
9

OH $
$48,105 Regression
$47,850 Residual
$44,775 Total
$41,250
$39,000
$42,900
$43,950
$44,850
$46,500
$49,500
$51,750
$52,500
$552,930.00
$46,077.50
Standard Error
937.42118
0.038331436

t Stat
31.63363206
17.9958789

Predicted OH $
Explained Residuals Squared Residual
$48,796.20530
$2,718.71
$7,391,358.50
$46,312.89694
$235.40
$55,411.72
$44,026.18382
($2,051.32)
$4,207,898.06
$40,808.23007
($5,269.27)
$27,765,205.55
$40,001.15486
($6,076.35)
$36,921,970.29
$42,794.87676
($3,282.62)
$10,775,615.32
$44,036.53094
($2,040.97)
$4,165,554.70
$45,174.71394
($902.79)
$815,022.67
$47,347.60875
$1,270.11
$1,613,176.25
$49,313.56121
$3,236.06
$10,472,092.13
$51,900.34075
$5,822.84
$33,905,474.37
$52,417.69666
$6,340.20
$40,198,093.63
$552,930.00
$0.00
$178,286,873.18
$46,077.50

X
6
10
8
11
5
12
9
7
4

Y
22
34
29
40
19
45
30
25
18

10
Total
Mean

b-value
Intercept
Formula

14
86

48
310

31
Hi-Low

Regression

3
6
y = 6 + 3X

3.268398268
2.891774892
y=2.891774892+ 3.268398268(X)

SUMMARY OUTPUT (Shadded Yellow)


Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

0.988576473
0.977283443
0.974443873
1.693506825
10

0.977283443

0.977283443

1
8
9

SS
987.0562771
22.94372294
1010

MS
987.0562771
2.867965368

Coefficients
2.891774892
3.268398268

Standard Error
1.606987982
0.176177712

t Stat
1.799500011
18.55171253
1.799500011
18.55171253

ANOVA
df
Regression
Residual
Total

Intercept
X

Actual value of Y when X is equal to 12 =


Best quess of Y, with knowledge of X equal to 12, is
Best quess of Y, with no knowledge of X, is the mean
Total Variation from the mean when X is = to 12
Explained Variation by knowing X is equal to 12
Unexplained Variation when X is equal to 12
RESIDUAL OUTPUT (Regression)
Observation #
1
2
3
4
5
6
7
8
9
10

X
6
10
8
11
5
12
9
7
4
14

45 - 31 =
42 - 31 =
45 - 42 =
Regression

Y
22
34
29
40
19
45
30
25
18
48

Predicted Y
22.5021645
35.57575758
29.03896104
38.84415584
19.23376623
42.11255411
32.30735931
25.77056277
15.96536797
48.64935065

Total

310

310

31

31

12 months and some partial

df
1
10
11

0.970046577
0.984909426
2.228138852

Lower 95%
27565.33215
0.604400117

2.228138842

Upper 95%
31742.74123
0.775215639

Unexplained Residuals Squared Residual Total Squared Residual


($691.21)
$477,764.76
$7,869,123.26
$1,537.10
$2,362,685.82
$2,418,097.54
$748.82
$560,725.67
$4,768,623.72
$441.77
$195,160.67
$27,960,366.22
($1,001.15)
$1,002,311.05
$37,924,281.34
$105.12
$11,050.90
$10,786,666.22
($86.53)
$7,487.60
$4,173,042.30
($324.71)
$105,439.14
$920,461.81
($847.61)
$718,440.60
$2,331,616.85
$186.44
$34,759.42
$10,506,851.55
($150.34)
$22,602.34
$33,928,076.71
$82.30
$6,773.84
$40,204,867.47
$0.00
$5,505,201.82
$183,792,075.00

Hi-Low Method
Y

48

14

18
30

4
10

3.268398268
2.891774892

Regression Statistics

F
344.1660377

Significance F
7.34874E-08

P-value
0.109636756
7.34874E-08

Lower 95%
-0.813946037
2.862131736

Hi-Low

Regression

45

45

42

42.11255411

31
14

31
14

11

11.11255411

2.887445887

Explained by X
Residuals

344.1660377
987.0562771
2.867965368
Upper 95%
6.597495821
3.674664801

2.306004135
-0.813946040
2.862131736

42.11233411 - 31
45 - 42.11255411
Unexplained

Squared

Residuals

Squared

-8.497835498

72.21320815

-0.502164502

0.252169187

4.575757576

20.93755739

-1.575757576

2.483011938

-1.961038961

3.845673807

-0.038961039

0.001517963

7.844155844

61.53078091

1.155844156

1.335975713

-11.76623377

138.444257

-0.233766234

0.054646652

11.11255411

123.4888589

2.887445887

8.337343753

1.307359307

1.709188359

-2.307359307

5.323906973

-5.229437229

27.34701374

-0.770562771

0.593766983

-15.03463203

226.0401604

2.034632035

4.139727516

17.64935065

311.4995783

-0.649350649

0.421656266

0.000000000

987.0562771

0.000000000

22.94372294

0.977283443
0.977283443
0.977283443
0.977283443
r=
0.988576473
r=
0.988576473

Graph -60

50

40

40

30

20

10

0
0

= T-value for df =8
6.597495824
3.674664801

Total Variation

Total Variation

Squared

-9

-9

81

-2

-2

81

-12

-12

144

14

14

196

-1

-1

-6

-6

36

-13

-13

169

17

17

289

1010
1010

Graph -- Data

8
x

10

12

14

16

Mhrs.
68
88
62
72
60
96
78
46
82
94
68
48
862

Labor Costs
1190
1211
1004
917
770
1456
1180
710
1316
1032
752
963

Predicted Labor Costs


1002.219152
1208.467054
940.3447813
1043.468733
919.7199911
1290.966215
1105.343103
775.3464593
1146.592684
1270.341425
1002.219152
795.9712496

12501
1041.75

12501

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.722103406
R Square
0.521433328
Adjusted R Square
0.473576661
Standard Error
170.5356646
Observations
12

170.5356646

ANOVA
df
Regression
Residual
Total

Intercept
Mhrs.

SS
316874.1211
290824.1289
607698.25

MS
316874.1211
29082.41289

Coefficients
Standard Error
300.9762837
229.754011
10.31239512
3.124146397

t Stat
1.309993598
3.300868081

1
10
11

187.780848
2.53294552
63.6552187
126.4687325
149.7199911
165.0337845
74.65689674
65.34645934
169.4073163
238.3414252
250.219152
167.0287504
1660.19152
138.3492934

F
Significance F
10.89573009
0.008001758

P-value
0.219491008
0.008001758

Lower 95%
Upper 95%
-210.9475525 812.9001199
3.351363186 17.27342706