The head of the warehousing division of Lachton, Co., was concerned about some cost behavior information given to him by the new assistant controller, who was hired because of his recent training in cost analysis. His first assignment was to apply regression analysis to various costs in the department. One of the results was presented as follows:
A regression on monthly data was run to explain building maintenance cost as a function of direct labor hours as the cost driver. The results are
Y = $7,810 - $.47X
I suggest that we use the building as intensively as possible to keep the maintenance costs down.
The department head was puzzled. How could increase use cause decreased maintenance cost? Explain this counterintuitive result to the department head. What step(s) did the assistant controller probably omit in applying and interpreting the regression analysis?

  • CreatedNovember 19, 2014
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