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Inthe firstregressionthecoefficient on machinehours

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Unformatted text preview: is is particularly true if the inspectors are paid a wage, and if they use electric or electronic machinery to test the units of product (cost of operating equipment increases with t ime spent). 2. Solut ion Exhibit 10­34 presents (a) the plots and regression line for number of units inspected versus inspect ion costs and (b) the plots and regressio n line for inspection labor­ hours and inspect ion costs. SOLUTION EXHIBIT 10­34A Plot and Regressio n Line for Units Inspected versus Inspect ion Costs for Newroute Manufacturing New route Manufacturing Inspection Costs and Units Inspected $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 0 500 1,000 1,500 2,000 2,500 3,000 Number of Units Inspected Inspection Costs SOLUTION EXHIBIT 10­34B Plot and Regressio n Line for Inspect ion Labor­Hours and Inspect ion Costs for Newroute Manufacturing New route Manufacturing Inspection Costs and Inspection Labor­Hours $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 0 50 100 150 200 250 300 Inspection Labor­Hours Inspection Costs Goodness of Fit. As you can see fro m the two graphs, the regression line based on number of units inspected better fits the data (has smaller vertical distances fro m the points to the line) 10­24 than the regressio n line based on inspect ion labor­hours. The activit y o f inspect ion appears to be more closely linearly related to the number of units inspected than inspect ion labor­ hours. Hence number of units inspected is a better cost driver. This is probably because the number of unit s inspected is closely related to test­kit usage, which is a significant component of inspect ion costs. Significance of independent variable. It is hard to visually co mpare the slopes because the graphs are not the same size, but both graphs have steep positive slopes indicating a strong relat ionship between number of units inspected and inspect ion costs, and inspect ion labor­ hours and inspect ion costs. Indeed, if labor­hours per inspect ion do not vary much, number of units inspected and inspection labor­hours will be closely related. Overall, it is the significant cost of test­kits that is driven by the number of unit s inspected (not the inspection labor­hours spent on inspect ion) that makes units inspected the preferred cost driver. 3. At 150 inspect ion labor...
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