Parker manufacturing has been using activity-based costing to determine the cost of product X-678. One of the activities, “Inspection,” occurs just before the product is finished. Fitzgerald inspects every 10th unit and has been using “number of units inspected” as the cost driver for inspection costs. A significant component of inspection costs is the cost of the test kit used in each inspection. Sharon MacPhen, the line manager, is wondering if inspection labor-hours might be a better cost driver for inspection costs. Sharon gathers information for weekly inspection costs, units inspected, and inspection labor-hours as follows:

Sharon runs regressions on each of the possible cost drivers and estimates these cost functions:

Inspection Costs = $ 98.79 + ($ 2.02 * Number of units inspected)

Inspection Costs = $ 3.89 + ($ 20.06 * Inspection labor-hours)

Required

1. Explain why number of units inspected and inspection labor-hours are plausible cost drivers of inspection costs.

2. Plot the data and regression line for units inspected and inspection costs. Plot the data and regression line for inspection labor-hours and inspection costs. Which cost driver of inspection costs would you choose? Explain.

3. Sharon expects inspectors to work 160 hours next period and to inspect 1,500 units. Using the cost driver you chose in requirement 2, what amount of inspection costs should Sharon budget? Explain any implications of Sharon choosing the cost driver you did not choose in requirement 2 to budget inspectioncosts.

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Week Units Inspected Inspection Labor-Hours Inspection Costs 1,800 800 2,100 2800 2,500 1,100 1,300 $3,600 1,700 4,400 5,700 5,200 2,300 2,800 210 250 260 230 110 130