The costdriveristhe factorthatisusedto predictthe

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Unformatted text preview: sion, coefficient of determination (r2) Objective: A AACSB: Analytical skills 174) Schotte packaging department. The most recent results of the two regressions are as follows: Manufact uring Machine-hours: Company Variable Coefficient Standard Error t-Value uses two Constant $748.30 $341.20 2.19 different Independent Variable $52.90 $35.20 1.50 independe nt r2 = 0.33 variables (machine- Number of packages: hours and Variable Coefficient Standard Error t-Value number of Constant $242.90 $75.04 3.24 packages) Independent Variable $5.60 $2.00 2.80 in two different r2 = 0.73 equations to evaluate Required: costs of a. What are the estimating equations for each cost driver? the b. Which cost driver is best and why? Answer: a. Machine-hours y = $748.30 + $52.90X Number of packages y = $242.90 + $5.60X b. Machine-hours has a low r2 which implies that a small proportion of the variance is explained by machine-hours, thereby making it less attractive than number of packages as a cost predictor. Also, for the independent variable, number of packages, the t-value of 2.80 indicates that a relationship exists between the independent and dependent variables. For machine-hours, the t-value (1.50) is below 2.00, indicating that the coefficient is not significantly different from zero and that there may not be a relationship between the independent and dependent variables. The t-values of the constant terms (g) for both drivers is greater than 2.00, therefore, there is no distinguishing characteristic between the constants. Diff: 2 Terms: cost estimation, simple regression, coefficient of determination (r2) Objective: A AACSB: Analytical skills 175) What are assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave? the two Answer: The two usual assumptions behind a simple linear cost function are: 1) Variations in the level of a single activity (the cost driver) explain the variations in the related total costs; and 2) Cost behavior is approximated by a linear cost function within the...
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