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Unformatted text preview: sus setup costs and (b) number of setup hours versus setup costs. SOLUTION EXHIBIT 10­38B Plots and Regressio n Lines for (a) Number of Setups versus Setup Costs and (b) Number o f Setup­Hours versus Setup Costs Tilbert Toys Setup Costs and Number of Setups \$140,000 \$120,000 \$100,000 \$80,000 \$60,000 \$40,000 \$20,000 \$0 0 50 100 150 200 250 300 Number of Setups Setup Costs Tilbert Toys Setup Costs and Number of Setup Hours \$140,000 \$120,000 \$100,000 \$80,000 \$60,000 \$40,000 \$20,000 \$0 0 500 1,000 1,500 2,000 2,500 Number of Setup Hours Setup Costs 10­32 3. Economic plausibilit y Number of Setups A posit ive relat ionship between setup costs and the number of setups is econo mically plausible. Number of Setup Hours A posit ive relat ionship between setup costs and the number of setup­ hours is also economically plausible, especially since setup time is not uniform, and the longer it takes to setup, the greater the setup costs, such as costs of setup labor and setup equipment. r2 = 85% standard error of regressio n =\$13,558 Excellent goodness of fit. The t­value of 6.36 is significant at the 0.05 level. Goodness of fit r2 = 34% standard error of regressio n =\$28,721 Poor goodness of fit. The t­value of 1.89 is not significant at the 0.05 level. Significance of Independent Variables Specificat ion analys is of estimat ion assumpt ions Based on a plot of the data, the linearit y assumpt ion ho lds, but the constant variance assumpt ion may be vio lated. The Durbin­Watson statist ic of 1.12 suggests the residuals are independent. The normalit y o f residuals assumpt ion appears to hold. However, inferences drawn fro m only 9 observat ions are not reliable. Based on a plot of the data, the assumpt ions of linearit y, constant variance, independence of residuals (Durbin­Watson = 1.50), and normalit y o f residuals ho ld. However, inferences drawn from only 9 observat ions are not reliable. 4. The regression model using number of setup­hours should be used to estimate set up costs because number of setup­hours is a more economically plausible cost driver of setup costs (compared to number of setups). The setup time is different for different products and the lo nger it takes to setup, the greater the setup costs such a...
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