The shipping manager of Sullivan is concerned about the recent increase in shipping costs. He is finding it difficult to predict shipping costs from one warehouse to the next or from one month to the next. After investigation, you determine that shipping costs are driven by one of the following activities:

• The number of shipments received

• The weight of the shipments received

• The dollar value of the shipments received

Based on this investigation, data on each activity were gathered for regression analysis and the following results were obtained:

Additional Information:
1. Management is expecting a 10 percent increase in product costs next year.
2. Only 80 percent of the warehouses have scales to weigh the shipments. Scales will have to be purchased for the other warehouses at a cost of $ 1,200 each.
3. The number of shipments varies widely between the warehouses, from a low of 17 shipments per month to a high of 102 shipments per month.
Required
A. Explain the rationale behind each of the cost driver– cost relationships.
B. Analyze this information and explain which variable (number of shipments, weight of shipments, or value of shipments) should be used to predict shipping costs in the future.

Transcribed Image Text:

Regression 1: Intercept Slope R square Number of Shipments 628,680 1,1278 0.95 Regression 2: intercept Slope R square Weight of Shipments 271,610 150.8 0.927 Regression 3: Intercept Slope R square Value of Shipments 236,790 0.123 0912