Nursery Supply manufactures wooden planter tubs for small trees. Each wooden planter requires about the same level of effort in labor and machinery. The managers of Nursery Supply want to improve the quality of their budgets. They are considering three alternative cost drivers for overhead: assembly time, labor hours, and machine hours. The statistics for regressions using last year’s monthly data for each of the three possible cost drivers follow:
Cost driver = Assembly time
Intercept = $55,000 (t-statistic = 2.44, p-value = 0.08)
Slope = $21.00 (t-statistic = 2.85, p-value = 0.05)
Adjusted R-square = 0.31
Cost driver = Labor hours
Intercept = $20,000 (t-statistic = 2.95, p-value = 0.03)
Slope = $31.00 (t-statistic = 3.00, p-value = 0.01)
Adjusted R-square = 0.46
Cost driver = Machine hours
Intercept = $10,000 (t-statistic = 1.45, p-value = 0.25)
Slope = $38.00 (t-statistic = 3.19, p-value = 0.005)
Adjusted R-square = 0.70

A. Write the cost function for each of the cost drivers.
B. Explain the meaning of the adjusted R-square for the assembly time analysis.
C. Explain the meaning of the p-value for the intercept in the machine hour’s analysis.
D. Explain the meaning of the p-value for the slope in the labor hour’s analysis.
E. Given only the regression results, which cost driver would you choose for overhead costs?
F. Why do managers often use models such as a cost function to estimate future costs?

  • CreatedJanuary 26, 2015
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