Designer Wear operates a chain of 10 retail department stores. Each department store makes its
own purchasing decisions. Barry Lee, assistant to the president of Designer Wear, is interested in
better understanding the drivers of purchasing department costs. For many years, Designer Wear
has allocated purchasing department costs to products on the basis of the dollar value of
merchandise purchased. A $100 item is allocated 10 times as many overhead costs associated
with the purchasing department as a $10 item. Lee recently attended a seminar titled “Cost
Drivers in the Retail Industry.” In a presentation at the seminar, Couture Fabrics, a leading
competitor that has implemented activity-based costing, reported number of purchase orders and
number of suppliers to be the two most important cost drivers of purchasing department costs.
The dollar value of merchandise purchased in each purchase order was not found to be a
significant cost driver. Lee interviewed several members of the purchasing department at the
Designer Wear store in Miami. They believed that Couture Fabrics’ conclusions also applied to
their purchasing department. Lee collects the following data for the most recent year for
Designer Wear’s 10 retail department stores:

Lee decides to use simple regression analysis to examine whether one or more of three variables
(the last three columns in the table) are cost drivers of purchasing department costs. Summary
results for these regressions are as follows: 

Regression 1: PDC = a + (b × MP$) 

Variable Coefficient Standard Error t-Value
Constant $1,040,594 $344,830 3.02
Independent variable 1: MP$ 0.0031 0.0037 0.83
r2 = 0.08; Durbin-Watson statistic =
2.42

Regression 2: PDC = a (b × No. of POs)

 Variable Coefficient Standard Error t-Value
Constant $ 731,687 $ 267,395 2.74
Independent variable 1: No. of POs $156.18 $65.19 2.40
r2 = 0.42; Durbin-Watson statistic =
1.99

Regression 3: PDC = a + (b × No. of Ss)

Variable Coefficient Standard Error t-Value
Constant $ 802,629 $ 248,566 3.23
Independent variable 1: No. of Ss $3,848 $1,660 2.32
r2 = 0.40; Durbin-Watson statistic =
2.00

1. Compare and evaluate the three simple regression models estimated by Lee. Graph each
one. Also, use the format employed in Exhibit 10-18 (page 406) to evaluate the information. 
2. Do the regression results support the Couture Fabrics’ presentation about the purchasing
department’s cost drivers? Which of these cost drivers would you recommend in designing
an ABC system? 
3. How might Lee gain additional evidence on drivers of purchasing department costs at
each of Designer Wear’s stores?