Study Appendix 3. The Tent Division of The Great Outdoor Equipment Company has had difficulty controlling its use of supplies. The company has traditionally regarded supplies as a purely variable cost. Nearly every time production was above average, however, the division spent less than predicted for supplies; when production was below average, the division spent more than predicted. This pattern suggested to Yuki Li, the new accountant, that part of the supplies cost was probably not related to production volume or was fixed.

She decided to use regression analysis to explore this issue. After consulting with production personnel, she considered two cost drivers for supplies cost: (1) number of tents produced, and (2) square feet of material used. She obtained the following results based on monthly data.

1. Which is the preferred cost function? Explain.

2. What percentage of the fluctuation of supplies cost depends on square feet of materials? Do fluctuations in supplies cost depend on anything other than square feet of materials? What proportion of the fluctuations is not explained by square feet of materials?

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Constant Variable coefficient R² Number of tents 2,300 0.033 0.220 Cost driver Square feet of material used 1,900 0.072 0.686